Bulletin
Investor Alert

New York Markets Close in:

Aug. 5, 2020, 6:11 a.m. EDT

10-Q: LUMBER LIQUIDATORS HOLDINGS, INC.

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Forward-Looking Statements

This report includes statements of the Company's expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meanings of the Private Securities Litigation Reform Act of 1995. These statements, which may be identified by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "thinks," "estimates," "seeks," "predicts," "could," "projects," "potential" and other similar terms and phrases, are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, the Company's management as of the date of such statements. These statements are subject to risks and uncertainties, all of which are difficult to predict and many of which are beyond the Company's control. These risks include, without limitation, the impact on us of any of the following:

an overall decline in the health of the economy, the hard-surface flooring

� impact on sales, ability to obtain and distribute products, and employee safety and retention, including the effects of the COVID-19 pandemic;

� obligations related to and impacts of new laws and regulations, including pertaining to tariffs and exemptions;

� the outcomes of legal proceedings, and the related impact on liquidity;

� obtaining products from abroad, including the effects of COVID-19 and tariffs, as well as the effects of antidumping and countervailing duties;

� reputational harm;

� obligations under various settlement agreements and other compliance matters;

� disruption due to cybersecurity threats, including any impacts from a network security incident;

� inability to open new stores, find suitable locations, and fund other capital expenditures;

� inability to execute on our key initiatives or such key initiatives do not yield desired results;

� managing growth;

� transportation costs;

� damage to our assets;

� disruption in our ability to distribute our products, including due to disruptions from the impacts of severe weather;

� operating stores in Canada and an office in China;

� managing third-party installers and product delivery companies;

Table of Contents

� renewing store, warehouse, or other corporate leases;

� having sufficient suppliers;

� our, and our suppliers', compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level;

� disruption in our ability to obtain products from our suppliers;

� product liability claims;

� availability of suitable hardwood, including due to disruptions from the impacts of severe weather;

� sufficient insurance coverage, including cybersecurity insurance;

� access to and costs of capital;

� the handling of confidential customer information, including the impacts from the California Consumer Privacy Act;

� management information systems disruptions;

� alternative e-commerce offerings;

� our advertising and overall marketing strategy;

� anticipating consumer trends;

� competition;

� impact of changes in accounting guidance, including the implementation guidelines and interpretations;

� maintenance of valuation allowances on deferred tax assets and the impacts thereof;

� internal controls;

� stock price volatility; and

� anti-takeover provisions

Information regarding risks and uncertainties is contained in the Company's reports filed with the SEC, including the Item 1A, "Risk Factors," section of this quarterly report and the Form 10-K for the year ended December 31, 2019.

This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. "Financial Statements" of this quarterly report and the audited financial statements and notes and management discussion included in the Company's annual report filed on Form 10-K for the year ended December 31, 2019.

Overview

Lumber Liquidators is one of the leading specialty retailers of hard-surface flooring in North America, offering a complete purchasing solution across an extensive assortment of domestic and exotic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile. We also feature the renewable flooring products bamboo and cork and provide a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. We offer installation and delivery services through third-party independent contractors for customers who purchase our floors. At June 30, 2020, we sold our products through 422 stores in 47 states in the United States and in Canada, a call center and websites.

We believe we have achieved a reputation for offering great value, superior service, and a broad selection of high-quality flooring products. With a balance of price, selection, quality, availability and service, we believe our value proposition is the most complete within a highly fragmented hard-surface flooring market. The foundation for our value proposition is strengthened by our unique store model, the industry expertise of our people, and our singular focus on hard-surface flooring.

To supplement the financial measures prepared in accordance with GAAP, we use the following non-GAAP financial measures: (i) Adjusted Gross Profit, (ii) Adjusted Gross Margin, (iii) Adjusted SG&A, (iv) Adjusted SG&A as a percentage of sales, (v) Adjusted Operating Income, (vi) Adjusted Operating Margin, (vii) Adjusted Earnings and (viii) Adjusted Earnings per Diluted Share. The non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with GAAP. These supplemental measures may vary from, and may not be comparable to, similarly titled measures by other companies.

Table of Contents

The non-GAAP financial measures are presented because management uses these non-GAAP financial measures to evaluate our operating performance and to determine incentive compensation. Therefore, we believe that the presentation of non-GAAP financial measures provides useful supplementary information to, and facilitates additional analysis by, investors. The presented non-GAAP financial measures exclude items that management does not believe reflect our core operating performance, which include regulatory and legal settlements and associated legal and operating costs, and changes in antidumping and countervailing duties, as such items are outside of our control due to their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.

Impact of COVID-19 Pandemic on Our Business

The second quarter of 2020 was significantly affected by the COVID-19 pandemic but throughout we remained focused on serving our customers while keeping the health and safety of employees and customers paramount. The results of the second quarter were atypical; readers should exercise caution before drawing conclusions, in considering trends, and/or in making judgements about profitability and cash flows. We operated in a variety of operating models (fully open, curbside-pickup, online) during the quarter and utilized safety measures such as personal protective equipment for employees and customers. Additional measures included contact-free and appointment-based engagement with customers, adding barriers at registers and social distancing signage and guidelines to our stores. These practices were implemented to comply with state and local ordinances along with recommendations from the CDC and State Boards of Health. By early July, 98% of stores were fully open, with less than 10 operating by appointment only. Only one store remained closed since the onset of the pandemic due to a unique store design while others closed periodically as warranted by market conditions. In addition, late in the first quarter we suspended third-party inventory count procedures at our stores, but we resumed these third-party count procedures by the end of the second quarter. As reported in the Company's first quarter earnings release, quarter-to-date comparable store sales were down approximately 30% through the week ended May 23. Improving performance in June resulted in a negative 21.3% comparable store sales for the full quarter.

Throughout the quarter, we leveraged strategic investments in digital capabilities made over the past 18 months, including the Floor Finder and Picture It! tools, to serve customers at LLFlooring.com. Web traffic has increased meaningfully particularly when store showrooms were less available. We have also expanded availability of online flooring samples and extended our hours for voice and click-to-chat customer support, while also continuing to offer curbside store pickup and enhanced home-delivery options.

In April, as a result of reduced demand and the changes in our operating models due to COVID-19, we temporarily furloughed a number of store associates and reduced operating hours in our distribution centers. As demand returned through the quarter, we recalled associates, and as of late June, had invited all furloughed employees back to work and had returned to normal operations in our distribution centers. We implemented a range of other measures to increase financial flexibility and maintain agility during this challenging time. These measures included reducing costs, managing inventory flow, deferring and abating certain payments, and delaying or stopping non-critical projects, including a pause in the planned opening of certain new stores and reducing capital spending. We also implemented a temporary reduction in all salaried corporate employee compensation and Board of Directors' compensation. As a result of improved business trends, the temporary reduction ended effective July 1, 2020.

As a result of these actions and managing working capital, the Company's liquidity position has improved during the second quarter by $55 million from March 31, 2020. As of June 30, 2020, the Company had $76 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan along with $127 million of cash and cash equivalents on its balance sheet. As of June 30, 2020, the Company had $186 million in liquidity, comprised of $127 million of cash and cash equivalents and $59 million of availability under the Credit Agreement. In April 2020, the Company amended its Credit Agreement as described in Note 5 of this Form 10-Q. Please see the "Liquidity and Capital Resources" discussion later in this MD&A for further discussion of cash in the quarter. Material items affecting the income statement will be discussed in their respective areas within this MD&A.

Table of Contents

Executive Summary

Results of operations for the three and six months ended June 30, 2020 as described below are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality and general economic conditions that may impact sales for the remainder of fiscal 2020. Additionally, we cannot predict the impact of the COVID-19 pandemic to our sales, supply chain, and distribution as well as to overall construction, renovation and consumer spending.

Net sales in the second quarter of 2020 decreased $58 million, or 20%, to $230 million from the second quarter of 2019. Comparable store sales for the second quarter of 2020 were down 21.3% driven by the impact of COVID-19, but improved sequentially as the quarter progressed and improved compared to the previously reported quarter-to-date decline of approximately 30% through May 23. The Company opened two net new stores in the second quarter of 2020 bringing total store count to 422 as of June 30, 2020.

Gross profit decreased 14% in the second quarter of 2020 to $88 million from $102 million in the comparable period in 2019, including the 2019 positive impact of classification adjustments related to tariffs as shown in the tables that follow. Without this item, Adjusted Gross Profit (a non-GAAP measure) decreased approximately $13 million. Adjusted Gross Margin (a non-GAAP measure) increased 309 basis points to 38.3% in the second quarter of 2020 from 35.2% in the second quarter of 2019 as margin enhancement efforts, Section 301 tariff exclusions and supply chain efficiency positively impacted results. Adjusted Gross Margin was also aided by a larger mix of higher-margin manufactured products, a lower mix of installation labor sales, and reduced discounting in stores. These items were somewhat offset by a higher year-over-year inventory obsolescence charge and higher customer delivery costs associated with delivery promotions.

SG&A expense decreased 21% to $82 million in the second quarter of 2020 from the comparable period in 2019 but included certain costs in both periods related to investigations and lawsuits. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) decreased 17%, or $16 million, compared to the same period in the prior year. The reduction in Adjusted SG&A was primarily driven by lower advertising expense as the Company reduced its promotional cadence in response to the COVID crisis; lower payroll and benefits expense as the Company took steps to align staffing with demand levels while also implementing temporary salary reductions for corporate office personnel and the Board of Directors; and lower transaction- and business-related costs due to lower sales. The Company's focus on expense management, liquidity preservation measures and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A in the quarter.

Operating income was $6 million for the second quarter of 2020 compared to an operating loss of $1.4 million for the second quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was $6.5 million for the second quarter of 2020, a year-over-year increase of over $2.9 million compared to adjusted operating income of $3.6 million for the second quarter of 2019. The year-over-year increase was primarily driven by the work to enhance gross margin while also diligently managing expenses.

Income tax expense was $2.2 million for the second quarter of 2020 compared to income tax expense of $0.4 million for the second quarter of 2019. The variability of our tax rate in 2020 reflects the timing of deductions and the CARES Act on our quarterly earnings.

Net income for the second quarter of 2020 increased $5.5 million to $2.6 million compared to a net loss of $2.9 million for the second quarter of 2019, while Adjusted Earnings (a non-GAAP measure) for the second quarter of 2020 was $3 million, a year-over-year increase of $2.2 million compared to Adjusted Earnings of $820 thousand for the second quarter of 2019.

Earnings per diluted share was $0.09 for the second quarter 2020 versus a loss per share of $0.10 in the year ago quarter. On an adjusted basis, second quarter earnings per diluted share increased $0.07 to $0.10 compared to an adjusted earnings per diluted share of $0.03 for the second quarter of 2019.

Table of Contents

As of June 30, 2020, the Company had $76 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan. Collectively, this is a $19 million increase from the end of the fourth quarter 2019 while the cash and cash equivalents balance increased by $118 million. As of June 30, 2020, the Company had $186 million in liquidity, comprised of $127 million of cash and cash equivalents and $59 million of availability under the Credit Agreement.







        Results of Operations
        We believe the selected sales data, the percentage relationship between net
        sales and major categories in the condensed consolidated statements of
        operations and the percentage change in the dollar amounts of each of the items
        presented below are important in evaluating the performance of our business
        operations.
                                                                                               % Improvement
                                                                   % of Net Sales              (Decline) in
                                                            Three Months Ended June 30,       Dollar Amounts
                                                              2020               2019          2020 VS 2019
        Net Sales
        Net Merchandise Sales                                      91.2 %             86.9 %           (16.2) %
        Net Services Sales                                          8.8 %             13.1 %           (46.6) %
        Total Net Sales                                           100.0 %            100.0 %           (20.2) %
        Gross Profit                                               38.3 %             35.5 %           (13.9) %
        Selling, General, and Administrative Expenses              35.7 %             36.0 %           (20.8) %
        Operating Income (Loss)                                     2.6 %            (0.5) %               NM %
        Other Expense (Income)                                      0.5 %              0.4 %              6.9 %
        Income (Loss) Before Income Taxes                           2.1 %            (0.8) %               NM %
        Income Tax Expense (Benefit)                                1.0 %              0.1 %            440.9 %
        Net Income (Loss)                                           1.1 %            (1.0) %               NM %
                                                                                               % Improvement
                                                                   % of Net Sales              (Decline) in
                                                             Six Months Ended June 30,        Dollar Amounts
                                                              2020               2019          2020 VS 2019
        Net Sales
        Net Merchandise Sales                                      90.2 %             88.1 %            (8.1) %
        Net Services Sales                                          9.8 %             11.9 %           (26.3) %
        Total Net Sales                                           100.0 %            100.0 %           (10.3) %
        Gross Profit                                               38.8 %             35.3 %            (1.4) %
        Selling, General, and Administrative Expenses              35.9 %             36.2 %           (11.2) %
        Operating Income (Loss)                                     3.0 %            (0.9) %               NM %
        Other Expense (Income)                                      0.4 %              0.4 %           (14.2) %
        Income (Loss) Before Income Taxes                           2.6 %            (1.3) %               NM %
        Income Tax Expense (Benefit)                              (0.4) %              0.1 %               NM %
        Net Income (Loss)                                           3.0 %            (1.4) %               NM %
        


Table of Contents







                                                              Three Months Ended         Six Months Ended
                                                                   June 30,                  June 30,
        SELECTED SALES DATA                                  2020         2019           2020       2019
        Average Sale1                                     $   1,209     $ 1,405      $  1,284    $ 1,354
        Average Retail Price per Unit Sold2                   (4.8) %       0.4 %       (1.1) %    (0.8) %
        Comparable Store Sales (Decrease) (%)                (21.3) %     (0.1) %      (11.6) %    (0.4) %
        Number of Stores Open, end of period                    422         415           422        415
        Number of Stores Opened in Period, net                    2           2             3          2
        Number of Stores Relocated in Period3                     -           -             1          -
        Comparable Stores4 (% change to prior year):
        Customers Invoiced5                                   (7.3) %     (2.5) %       (6.4) %    (0.3) %
        Net Sales of Stores Operating for 13 to 36 months    (15.9) %      12.9 %       (6.5) %      8.9 %
        Net Sales of Stores Operating for more than
        36 months                                            (21.6) %     (0.3) %      (11.8) %    (0.3) %
        Net Sales in Markets with all Stores Comparable
        (no cannibalization)                                 (20.9) %       0.4 %      (11.2) %      0.1 %
        


1 Average sale is defined as the average invoiced sales order, measured quarterly, excluding returns as well as transactions under $100 (which are generally sample orders or add-on/accessories to existing orders).

2 Average retail price per unit (square feet for flooring and other units of measures for moldings and accessories) sold is calculated on a total company basis and excludes non-merchandise revenue.

3 A relocated store remains a comparable store as long as it is relocated within the primary trade area.

4 A store is generally considered comparable on the first day of the thirteenth full calendar month after opening.

5 Change in number of customers invoiced is calculated by applying the average sale, described above, to total net sales at comparable stores.

NM Not meaningful.

Net Sales

Net sales in the second quarter of 2020 decreased $58 million, or 20%, to $230 million from the second quarter of 2019. Comparable store sales for the second quarter of 2020 were down 21.3% driven by the impact of COVID-19, but improved sequentially as the quarter progressed and improved compared to the previously reported second quarter-to-date decline of approximately 30% through May 23. The Company opened three new stores and closed one in the second quarter of 2020 bringing total store count to 422 as of June 30, 2020. By major category, manufactured products grew from 41% of sales in the second quarter of 2019 to 49% of sales in the second quarter of 2020, partially offset by a decline in solid and engineered hardwood products. The vinyl sub-category within manufactured products continues to drive growth due to its outstanding aesthetics, high resilience and waterproof characteristics. Net services sales (install and freight) decreased 47% in the three months ended June 30, 2020 from the second quarter of 2019 due an outsized COVID-19 impact on in-home installations.

Net sales for the six months ended June 30, 2020 decreased 10% from the comparable period in 2019. Through the week ending March 21, 2020, the Company's year-to-date comparable store sales increased approximately 4%, but as the impact of COVID-19 began to broadly impact consumers, orders declined significantly and first half comparable stores sales fell to negative 11.6% by the end of the six month period ended June 30, 2020.

Table of Contents

Gross Profit

Gross profit decreased 14% in the second quarter of 2020 to $88 million from $102 million in the comparable period in 2019, including the 2019 positive impact of classification adjustments related to tariffs as shown in the tables that follow. Without this item, Adjusted Gross Profit (a non-GAAP measure) decreased approximately $13 million. Adjusted Gross Margin (a non-GAAP measure) increased 309 basis points to 38.3% in the second quarter of 2020 from 35.2% in the second quarter of 2019 as margin enhancement efforts, Section 301 tariff exclusions and supply chain efficiency positively impacted results. Adjusted Gross Margin was also aided by a larger mix of higher-margin manufactured products, a lower mix of installation labor sales, and reduced discounting in stores. These items were somewhat offset by a higher year-over-year inventory obsolescence charge and higher customer delivery costs associated with delivery promotions.

Gross profit was $193 million and $196 million for the six months ended June 30, 2020 and the comparable period in 2019, respectively, despite the impact of COVID-19 on sales in 2020. Adjusted Gross Margin increased from 35.2% for the first six months of 2019 to 38.8% for the first six months of 2020 primarily due margin enhancement efforts, tariff exclusions and supply chain efficiency positively impacted results.

Tariffs played a significant role in year-over-year comparisons. Beginning in September 2018, goods coming from China received an additional 10% tariff. Beginning in June 2019, the tariffs increased to 25%. In order to mitigate the impact of tariffs, we reduced discounting in the stores, implemented merchandising cost-out efforts and enacted retail price increases. On November 7, 2019, the United States Trade Representative ("USTR") ruled on a request made by certain interested parties, including the Company, and retroactively excluded certain flooring products imported from China from the Section 301 tariffs. The granted exclusion applies retroactively from the date the tariffs were originally implemented on September 24, 2018 through August 7, 2020. The Company is monitoring the expiration of this exclusion currently slated for August 7, 2020. Should the tariff exclusion not be extended, there would be an impact to cash flow related to future product purchases, but a delayed impact to gross margin based primarily on the flow of inventory. The Company recorded a $27 million receivable related to these tariffs during the fourth quarter of 2019 in the caption "Tariff Recovery Receivable" on the Consolidated Balance Sheets and has collected $9 million through the first six months of 2020. The Company still expects to receive the remaining payments by the end of 2020.







                                                    Three Months Ended                                Six Months Ended
                                                         June 30,                                         June 30,
                                              2020                     2019                     2020                     2019
                                         $       % of Sales       $       % of Sales       $       % of Sales       $       % of Sales
                                                  (dollars in thousands)                           (dollars in thousands)
        Gross Profit, as reported
        (GAAP)                        $ 88,292         38.3 % $ 102,487         35.5 % $ 193,263         38.8 % $ 196,098         35.3 %
        HTS Classification
        Adjustments 1                        -            - %     (779)        (0.3) %         -            - %     (779)        (0.1) %
        Sub-Total Items above                -            - %     (779)        (0.3) %         -            - %     (779)        (0.1) %
        Adjusted Gross Profit
        (non-GAAP measures)           $ 88,292         38.3 % $ 101,708         35.2 % $ 193,263         38.8 % $ 195,319         35.2 %
        


1 Represents classification adjustments related to the HTS duty categorization in prior periods during the three and six months ended June 30, 2019.

Selling, General and Administrative Expenses

SG&A expense decreased 21% to $82 million in the second quarter of 2020 from the comparable period in 2019 but included certain costs in both periods related to investigations and lawsuits. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) decreased 17%, or $16 million, to the same period in the prior year. The reduction in Adjusted SG&A was primarily driven by lower advertising expense as the Company reduced its promotional cadence in reaction to the COVID crisis; lower payroll, overtime and benefits expense as the Company took steps to align staffing with demand levels while also implementing temporary salary reductions for corporate office personnel and the Board of Directors; and lower credit card, bank fees and other transaction-related

Table of Contents

costs due to lower sales. In addition, equity compensation, supplies and T&E expenses were lower versus second quarter last year. The Company's focus on expense management, liquidity preservation measures and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A in the quarter.

. . .

Aug 05, 2020

COMTEX_368907811/2041/2020-08-05T06:11:24

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2020 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.