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10-Q: LUMBER LIQUIDATORS HOLDINGS, INC.

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(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:

obtaining products from abroad, including the effects of the COVID-19 pandemic ? and tariffs, delays in shipping, as well as the effects of antidumping and countervailing duties;

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? having sufficient inventory for consumer demand;

? a sustained period of inflation impacting consumer spending;

? inability to hire and/or retain employees;

an overall decline in the health of the economy, the hard-surface flooring ? industry, the housing market and overall consumer spending, including the effects of the COVID-19 pandemic;

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

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

? reputational harm;

? obligations under various settlement agreements and other compliance matters;

? disruptions due to cybersecurity threats, including any impacts from a network security incident;

? inability to open new stores, find suitable locations for our new store concept, and fund other capital expenditures;

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

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

? operating an office in China;

? managing third-party installers and product delivery companies;

? our ability to develop, grow and maintain business relationships with professional contractors;

? renewing store, warehouse, or other corporate leases;

? international and domestic transportation costs and availability;

? having sufficient suppliers;

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

? product liability claims, marketing substantiation claims, wage and hour claims, employment classification claims and other labor and employment 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 and other applicable data privacy laws and regulations;

? our ability to develop digital technology needed to grow our business and meet customer expectations;

? management information systems disruptions;

? alternative e-commerce offerings;

? our advertising and overall marketing strategy, including anticipating consumer trends;

? competition;

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

? 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, 2020.

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, 2020.

Overview

LL Flooring is one of the leading specialty retailers of hard-surface flooring in the U.S. with 422 stores as of

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September 30, 2021. Our Company seeks to offer the best customer experience online and in stores, with more than 500 varieties of hard-surface floors featuring a range of quality styles and on-trend designs. Our online tools also help empower customers to find the right solution for the space they've envisioned. Our extensive selection includes vinyl plank, solid and engineered hardwood, laminate, bamboo, porcelain tile, and cork, with a wide range of flooring enhancements and accessories to complement. Our stores are staffed with flooring experts who provide advice, Pro partnership services and installation options for all of our products, the majority of which is in stock and ready for delivery.

Our vision is to be the customer's first choice in hard-surface flooring by providing the best experience, from start to finish. We offer a wide selection of high-quality, stocked products and the accessible flooring expertise and service of a local store, with the scale, omni-channel convenience and value of a national chain. We plan to leverage this advantage to differentiate ourselves in the highly fragmented flooring market. We launched our new digital platform, LLFlooring.com, in December 2020. In February 2021, we launched our new mobile app featuring our popular Picture It and Floor Finder tools and making it easy to order installations.

To supplement the financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses 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 net sales; (v) Adjusted Operating Income; (vi) Adjusted Operating Margin; (vii) Adjusted Other Expense;

The non-GAAP financial measures are presented because management uses these non-GAAP financial measures to evaluate our operating performance and, in certain cases, 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 store closures, 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.

Results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including supply chain, seasonality, tariffs, and general economic conditions, as well as the uncertainty and ongoing impact of the COVID-19 pandemic that may impact sales for the remainder of fiscal 2021.

Third Quarter Financial Highlights

Net sales of $282.2 million decreased 4.6% compared to the same period last ? year, as double-digit growth in Pro and services sales partially offset a decrease in DIY sales.

? Total comparable store sales decreased 4.5% versus the same period last year.

Gross margin of 37.3% decreased 210 basis points as a percentage of sales compared to the same period last year, Adjusted Gross Margin (a non-GAAP measure) of 37.3% decreased 240 basis points as a percentage of sales compared ? to the same period last year, primarily reflecting significantly higher transportation and material costs, and higher tariffs (collectively up more than 700 basis points) that the Company was able to partially mitigate by pricing, promotion and alternative country/vendor sourcing strategies.

SG&A expense as a percentage of sales of 33.0% increased 140 basis points compared to the third quarter of last year. Adjusted SG&A (a non-GAAP measure) ? as a percentage of sales of 33.1% increased 320 basis points compared to the third quarter of last year, primarily due to increased investment in the field and to support growth initiatives, as well as last year's $2.5 million favorable business interruption insurance settlement.

Operating margin of 4.3% decreased 350 basis points compared to the third ? quarter of last year. Adjusted operating margin (a non-GAAP measure) of 4.1% decreased 560 basis points compared to the third quarter of last year.

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Diluted EPS of $0.30 decreased $0.23 compared to the third quarter of last ? year. Adjusted Earnings per Diluted Share (a non-GAAP measure) of $0.29 decreased $0.38 compared to the third quarter of last year.

? During the third quarter, the Company opened six new stores, bringing total stores to 422 as of September 30, 2021.

Other Items

Liquidity and Credit Agreement

As of September 30, 2021, we had liquidity of $232.2 million, consisting of excess availability under our Credit Agreement of $128.0 million, and cash and cash equivalents of $104.2 million. This represents an increase in liquidity of $18.2 million from December 31, 2020. We repaid all $101.0 million of our outstanding debt in the second quarter of 2021 and did not access borrowings under the Credit Agreement during the third quarter.

We believe that cash flows from operations, together with cash on hand, and the availability under our Credit Agreement will be sufficient to meet our obligations, fund our settlements, operations, and anticipated capital expenditures for the next 12 months. In the coming quarters we also plan to increase our inventories as supply chain disruptions abate. We prepare our forecasted cash flow and liquidity estimates based on assumptions that we believe to be reasonable but are also inherently uncertain. Actual future cash flows could differ from these estimates.

Impact of Macroeconomic Environment

We continue to navigate uncertainty in the macroeconomic environment related to global supply chain disruptions, consumer spending, inflation and a challenging labor market. During the second quarter of 2020 we limited our inventory purchases as a direct result COVID-19. Supply chain disruption on replenishment kept inventory below our targeted level during the second half of 2020 and first nine months of 2021. As a result, we believe we could have captured more sales in the fourth quarter of 2020 and first nine months of 2021 if our inventories had been higher. While our supply chain teams continue to work diligently to bring in new inventory and allocate it effectively across our stores, we anticipate the supply chain to remain constrained into 2022, limiting inventory availability and increasing transportation and material costs. Supply chain constraints include international container access, congestion in major ports, and a shortage of domestic truckers, as well as renewed COVID-19 related shutdowns for some of our sourcing partners across southeast Asia.

Section 301 Tariffs

The Company's financial statements have been impacted by Section 301 tariffs on certain products imported from China in recent years. A subset of these imports for certain click vinyl and other engineered products (the "Subset Products") received an exemption that was made retroactive to the beginning of the Section 301 Tariffs for a period of time but were reinstated in August 2020. The tariffs flow through the income statement as the product is sold. The Company has deployed strategies to mitigate tariffs and improve gross margin, primarily through adjusting its pricing and promotion strategies and alternative country sourcing. The following chart provides a timeline of tariff levels for the key events related to Section 301 Tariffs.







                                                      Section 301 tariff                   Corresponding approximate
                  Event                  Timing        level on imports  Tariff level on    percentage of Company's
                                                          from China     Subset Products merchandise subject to tariff
        Imposition of Tariffs        September 2018          10%          10% then 0%1                48%
        Increase in Tariffs            June 2019             25%          25% then 0%1                44%
        Retroactive Exemption on     November 2019           25%               0%                     10%
        Subset Products1
        Exemption Not Renewed and
        Tariffs Re-imposed on         August 2020            25%               25%                    32%
        Subset Products
                                   September 30, 2021        25%               25%                    22%
        


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On November 7, 2019, the U.S. Trade Representative granted a retroactive 1 exclusion to September 2018 on Subset Products as defined in the Section 301 Tariffs section above bringing the rate to 0%.







        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.
                                                                                                    % Increase
                                                                   % of Net Sales                  (Decrease) in
                                                          Three Months Ended September 30,        Dollar Amounts
                                                             2021                   2020           2021 VS 2020
        Net Sales
        Net Merchandise Sales                                      85.3 %                 88.2 %            (7.7) %
        Net Services Sales                                         14.7 %                 11.8 %             19.0 %
        Total Net Sales                                           100.0 %                100.0 %            (4.6) %
        Gross Profit                                               37.3 %                 39.4 %            (9.7) %
        Selling, General, and Administrative Expenses              33.0 %                 31.6 %            (0.2) %
        Operating Income                                            4.3 %                  7.8 %           (48.0) %
        Other Expense                                               0.0 %                  0.2 %           (97.4) %
        Income Before Income Taxes                                  4.3 %                  7.6 %           (46.5) %
        Income Tax Expense                                          1.2 %                  2.4 %           (53.5) %
        Net Income                                                  3.1 %                  5.2 %           (43.4) %
                                                                                                    % Increase
                                                                   % of Net Sales                  (Decrease) in
                                                           Nine Months Ended September 30,        Dollar Amounts
                                                             2021                   2020           2021 VS 2020
        Net Sales
        Net Merchandise Sales                                      86.5 %                 89.5 %              5.7 %
        Net Services Sales                                         13.5 %                 10.5 %             39.5 %
        Total Net Sales                                           100.0 %                100.0 %              9.3 %
        Gross Profit                                               38.5 %                 39.0 %              7.7 %
        Selling, General, and Administrative Expenses              33.7 %                 34.3 %              7.3 %
        Operating Income                                            4.8 %                  4.8 %             10.1 %
        Other Expense                                               0.0 %                  0.3 %               NM %
        Income Before Income Taxes                                  4.8 %                  4.4 %             19.3 %
        Income Tax Expense                                          1.2 %                  0.6 %            119.7 %
        Net Income                                                  3.6 %                  3.8 %              3.3 %
        








                                                            Three Months Ended         Nine Months Ended
                                                              September 30,              September 30,
        SELECTED SALES DATA                                2021         2020           2021        2020
        Average Sale1                                   $   1,625     $ 1,366      $  1,530     $ 1,313
        Average Retail Price per Unit Sold Increase
        (Decrease)2                                           6.8 %       0.7 %         7.9 %     (0.3) %
        Comparable Store Sales (Decrease) Increase3         (4.5) %      10.9 %         9.8 %     (4.3) %
        Customers Invoiced (Decrease) Increase 4           (23.5) %      13.8 %       (9.4) %     (1.0) %
        Number of Stores Open, end of period                  422         423           422         423
        Number of Stores Opened in Period, net                  6           1            12           4
        Number of Stores Relocated in Period5                   -           -             -           1
        


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

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

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

NM Not meaningful.

Net Sales

Third quarter 2021 net sales of $282.2 million decreased $13.6 million, or 4.6%, versus the third quarter of 2020. Net merchandise sales decreased 7.7%, partially offset by a 19.0% increase in net service sales (install and freight). The increase in net service sales primarily reflects consumers' increased comfort with having professionals enter their homes compared to the third quarter 2020. Average ticket increased 19.0%, reflecting a greater penetration of installation sales as well as higher merchandise average ticket. This was a result of us refreshing our assortment with new higher-quality products and sharing a portion of increased costs with consumers. Comparable store sales for the third quarter of 2021 decreased 4.5% from the third quarter of 2020, due to consumer demand shifts given increased consumer mobility this year, continued supply chain constraints, as well as the substantial nesting spending that we saw in the third quarter of 2020. We also had a 23.5% decrease in transaction count compared to the same period in 2020, primarily reflecting the decrease in sales to DIY customers, as well as lower than optimal inventory levels. During the third quarter of 2021, the Company opened six new stores bringing the total store count to 422 as of September 30, 2021.

Net sales for the nine months ended September 30, 2021 increased 9.3% from the comparable period in 2020. Net merchandise sales increased 5.7% and net service sales increased 39.5% over the comparable period in 2020. Comparable store sales for the nine months ended September 30, 2021 increased 9.8% from the comparable period in 2020.

Gross Profit

Gross profit decreased 9.7% in the third quarter of 2021 to $105.2 million from $116.5 million in the comparable period in 2020 and gross margin decreased 210 basis points to 37.3% in the third quarter of 2021 from 39.4% in the third quarter of 2020. The third quarter of 2020 was impacted by store closure costs of Canadian and certain U.S. stores. Excluding this item as shown on the table that follows, Adjusted Gross Margin (a non-GAAP measure) of 37.3% decreased 240 basis points as a percentage of sales compared to the same period last year, primarily reflecting significantly higher transportation and material costs, and higher tariffs (collectively up more than 700 basis points) that the Company was able to partially mitigate by pricing, promotion and alternative country/vendor sourcing strategies.

Gross profit increased 7.7% for the nine months ended September 30, 2021 to $333.5 million from $309.8 million in the comparable period in 2020 and gross margin decreased 50 basis points to 38.5% in the nine month period 2021 from 39.0% in 2020. For the first nine months of 2021, the Company reported a positive $6.6 million impact from anti-dumping duty rate changes. Excluding this item as shown on the table that follows, Adjusted Gross Profit (a non-GAAP measure) increased by $16.4 million and Adjusted Gross Margin (a non-GAAP measure) of 37.7% decreased by 140 basis points compared to 2020. The decrease in adjusted gross margin was due primarily to the August 2020 reinstatement of tariffs on certain flooring products imported from China (discussed in the "Section 301 Tariffs" section that follows) and higher transportation and material costs (collectively up more than 400 basis points) that the Company was able to partially mitigate by pricing, promotion and alternative country/vendor sourcing strategies.

We believe that the following items set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.

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                                             Three Months Ended September 30,                   Nine Months Ended September 30,
                                               2021                     2020                     2021                     2020
                                          $       % of Sales       $       % of Sales       $       % of Sales       $       % of Sales
                                                  (dollars in thousands)                            (dollars in thousands)
        Gross Profit, as reported
        (GAAP)                        $ 105,201         37.3 % $ 116,526         39.4 % $ 333,523         38.5 % $ 309,789         39.0 %
        Antidumping Adjustments 1             -            - %         -            - %   (6,566)        (0.8) %         -            - %
        Store Closure Costs 2                 -            - %       761          0.3 %         -            - %       761          0.1 %
        Sub-Total Items above                 -            - %       761          0.3 %   (6,566)        (0.8) %       761          0.1 %
        Adjusted Gross Profit
        (non-GAAP measures)           $ 105,201         37.3 % $ 117,287         39.7 % $ 326,957         37.7 % $ 310,550         39.1 %
        


1 Represents antidumping expense associated with applicable prior-year shipments of engineered hardwood from China.

2 Represents the inventory write-offs related to the Canadian and U.S. store closures described more fully in Note 8 to the condensed consolidated financial statements filed in the September 30, 2020 10-Q,

Selling, General and Administrative Expenses

SG&A expense for the third quarter of 2021 decreased $0.2 million to $93.2 million, or 33.0% of sales, compared to $93.4 million, or 31.6% of sales, in the third quarter of 2020. SG&A in both quarters included certain recoveries and costs related to legal matters and settlements. Additionally, the third quarter of 2020 included costs related to Canadian and U.S. store closures. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) for the third quarter of 2021 was $93.5 million, compared to $88.6 million in the third quarter of 2020. As a percentage of sales, adjusted SG&A increased 320 basis points, to 33.1% of sales, compared to 29.9% for the third quarter in 2020, which reflected increased investment in the field and our growth initiatives, as well as last year's $2.5 million favorable final settlement of the business insurance claim related to the August 2019 network security incident.

SG&A expense for the first nine months of 2021 was $291.8 million, or 33.7% of sales, improving by 60 basis points from the comparable period in 2020. SG&A in both periods included certain costs related to legal matters and settlements. Additionally, the 2020 period included costs related to Canadian and U.S. store closures. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) was $284.0 million for the 2021 nine-month period, compared to $265.8 million in 2020. As a percentage of sales, adjusted SG&A improved 70 basis points, to 32.8% of sales, compared to 33.5% for the same period in the prior year, which was a result of the higher sales volume in 2021. The higher overall SG&A was primarily driven by the substantial actions taken last year to address the COVID-19 pandemic, including lower payroll and benefits expense as we proactively aligned staffing with demand levels, temporary salary reductions for corporate office personnel and the Board of Directors, and lower advertising expense. The Company redeemed $3.1 million of MDL and Gold vouchers during the first nine months of 2021 and relieved the accrual for legal matters and settlements for the full amount, relieved inventory at its cost, and the remaining amount -- the gross margin for the items sold of $1.2 million was recorded as a reduction in SG&A expense.

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We believe that the following items set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.







                                        Three Months Ended September 30,                   Nine Months Ended September 30,
                                          2021                    2020                      2021                     2020
                                     $       % of Sales      $       % of Sales        $       % of Sales       $       % of Sales
                                             (dollars in thousands)                            (dollars in thousands)
        SG&A, as reported (GAAP)  $ 93,165         33.0 % $ 93,374         31.6 %  $ 291,767         33.7 % $ 271,869         34.3 %
        (Recovery) Accrual for
        Legal Matters and
        Settlements 3                (400)        (0.1) %    2,000          0.7 %      7,275          0.8 %     1,500          0.2 %
        Legal and Professional
        Fees 4                          43          0.0 %      999          0.3 %        470          0.1 %     2,787          0.4 %
        . . .
        


Nov 03, 2021

COMTEX_396279462/2041/2021-11-03T06:04:24

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