Q4 2020 Lumber Liquidators Holdings Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the lumber Liquidators fourth quarter and full year 2020 earnings conference call.
As a reminder, this conference is being recorded and may not be reproduced in full or in part without permission from the company.
I would now like to turn the conference over to Julie Mcmeen.
Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us.
Today, I'm joined by Charles Tyson, our President and Chief Executive Officer.
And Nancy Walsh, our Chief Financial Officer.
As we begin let me reference the safe Harbor provisions of the U S Securities laws.
For forward looking statements.
This conference call may contain forward looking statements that are subject to significant risks.
And uncertainties, including the future operating and financial performance of lumber liquidators.
Although lumber liquidators believes that the expectations reflected in its forward looking statements are reasonable if.
If you can give no assurance that such expectations or any of its forward looking statements will prove to be correct.
Important risk factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in lumber liquidators filings with the SEC.
During today's conference call management will be discussing results on an adjusted basis.
A reconciliation of non-GAAP financial measures.
To the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful.
<unk> discussed in today's earnings release.
The information contained in this call is accurate only as of the date discussed investors should not assume that the statements will remain operative after today.
And lumber liquidators undertakes no obligation to update any information discussed in this call.
Now I'm pleased to introduce <unk>, President and CEO Charles Tyson Charles.
Thank you Julie.
A year ago I share with you my excitement about the opportunities ahead for us to leverage our solid foundation is our high touch specialty flooring company.
Execute our transformation plan and deliver shareholder value.
As I look back on 2020 I'm, both proud of all that our team has accomplished and energized by how much opportunity still lies ahead.
2020 was a dynamic and challenging year cusp.
Customers demand at a safe Omnichannel shopping experience.
Our teams rose to the occasion.
I want to thank our entire team for the commitment flexibility and perseverance throughout the entire year to deliver both strong financial results and outstanding service to our customers.
I'm very proud to be leading such a dedicated team who are working every day to execute our transformation strategy.
Elevate the experience for all customers, whether they are DIY do it for me or approach.
I also want to thank our vendors landlords and suppliers for helping us navigate through the COVID-19 environment.
Service our customers.
Turning to our positive results for the quarter, we demonstrated solid progress on our transformation plan.
Which positioned us to take advantage of our robust home improvement spending environment.
In the fourth quarter.
The increase in comp sales.
We also achieved an impressive operating income of $18 million when compared to $19 million in the fourth quarter of 2019.
Given the prior year fourth quarter included a onetime 11 million benefit from the retroactive exclusion of section 301 tariffs.
This underscores the underlying operating profit improvement, we achieved in 2020 versus 2019.
For the full year, we delivered $1 1 billion and net sales flat to 2019 debt.
Demonstrating resilience as we navigated the COVID-19 shutdown in the spring to grow comp sales 10, 8% in the second half of 2020.
We also achieved significantly higher profitability due to progress on our profit initiatives with adjusted operating income of $64 million.
Oh from $25 million in 2019, and an adjusted operating margin of five 8%.
350 basis points versus 2019.
These strong fourth quarter and full year financial results reflect our continued execution against our strategic pillars of people and culture, improving the customer experience driving traffic and transactions in our stores and online.
And improving profitability.
Our first strategic pillar people and culture is a critical driving force behind our transformation strategy.
During the fourth quarter, we formalized our company's vision purpose and values, making a critical step in developing our culture and executing our strategy to serve our customers at the highest level.
Our vision is to be the customers' first choice in hard surface flooring by providing the best experience from start to finish.
Focusing on our associates, we're deploying robust training programs that help them achieve this vision by better serving our customers.
We are making progress on ensuring that we have the right leaders in the right roles to effectively achieve our company's goals.
During the fourth quarter, we added more regional and store managers in training to build our bench for future store leadership.
Our second pillar is improving the customer experience.
First I want to reiterate our brand promise to our customers.
We offer a wide selection of high quality stocked products and the accessible flooring expertise and service of a local store with the scale omnichannel convenience and value of a national chain.
We plan to leverage this advantage to differentiate ourselves in the highly fragmented flooring market.
During the fourth quarter, we made good progress towards elevating the customer experience.
I am pleased to announce the launch of our new digital platform in December of 2020.
If you've not visited the new Ll flooring Dot com site I encourage you to take a look.
The mobile friendly site features inspirational content the better tells a story.
Clearly showcases our flooring and digital room scenes highlights our digital tools like picture it and flow finder.
Our services, such as installation free flooring samples and delivery.
Installation is an important service that we provide.
Fourth quarter installation sales were up versus the same period in 2019 and sequentially from the third quarter.
Reflecting progress on our initiatives and the willingness by customers to have installers in their homes.
New installation assessment trends indicate demands installation services remains strong.
However, we will monitor the COVID-19 environment and customers continued willingness to have installers in their homes.
During the fourth quarter, we began testing a new in store portal the installations that will increase efficiency for our store associates and reduced turnaround time for our customers when quoting new jobs.
Our sales to pros were flat in the fourth quarter versus a year ago.
Building, our pro business as a core element of our transformation strategy.
We remain focused on transitioning from a transactional sales approach to building longer term relationships and credibility with pros, which will take some time.
We expect to drive growth during this evolution.
Investing in tools and sales strategies, including a new trial scale and retention program, which provides a roadmap to our store associates as they build trusted partnerships with this important customer segment.
Our teams are also working hard to learn more about what our pros won.
And where we are leveraging enhance reporting to better understand pro behaviors at the local store level.
Finally, we are watching the impact of COVID-19 on customers letting pros into their homes.
Turning to our third strategic pillar of driving traffic and transactions in both stores and online.
For the fourth quarter, our web sales increased more than 90% versus 2019 with.
We're pleased with the new customer growth our investment in digital marketing is delivering.
We're encouraged to see so many customers want to engage online for large ticket purchases.
We're extremely excited about our new digital platform that launched at the end of fourth quarter.
This new platform builds on the great work our teams have done over the past two years and further advances our omni channel strategy.
We're particularly pleased with how the enhanced mobile experience is engaging our customers.
Our product assortment is a key competitive advantage.
Traffic driver.
During the fourth quarter, we emphasized is driving new design and innovation and our most popular vinyl and wood categories, such as our Bellwood brand.
Vinyl benefited from an expanded assortment and we see room to expand it further in 2021.
As a high touch high surface flooring retailer.
Also emphasize selling a complete solution to our customers.
Adding the necessary higher margin attachment such as moldings and other accessories.
We were pleased with the comp growth in accessory sales in the fourth quarter versus 2019.
This growth was significantly driven by training programs for sales associates and increased awareness through Ll flooring dot com.
We continue to evolve our brand and both the new digital platform and physical stores are critical components of this.
We're pleased with the performance of our brand revitalization pilot of 20 plus stores.
Based on early feedback customers, who experienced the Ll flooring brand viewed it as more approachable relevant and of higher quality.
We're looking forward to the broader rollout of the brand revitalization for our stores. This spring as part of our long term brand evolution.
And fourth improving profitability.
In the fourth quarter execution of our gross margin improvement strategies was meaningful.
And sourcing teams continued their work on improving pricing and promotional strategies.
Introducing new products and driving our alternative country sourcing strategies to improve gross margins.
We ended 2020 with 34% of our goods purchased from China.
<unk> from 46% for the full year of 2019.
The pace of our sourcing diversification.
As impressive given the substantial vetting process, we undertake to ensure a rigorous quality standards are met.
Our fourth quarter adjusted gross profit was $116 million up from $112 million in 2019, and adjusted gross margin was 38 per cent compared to 41% in the fourth quarter of 2019.
It's hard to see the full impact of our good work on gross margin because we're comparing against the 13 million one time benefit in the fourth quarter of 2019 from the retroactive exclusion of section 301 tariffs.
When excluding that item our adjusted gross margin increased 200 basis points from the fourth quarter of 2019.
We remain focused on executing our transformation plan and making progress against our strategic pillars to position us for long term success.
I want to briefly update you on recent developments under each of our four pillars.
First let's start with people and culture.
Our diversity equity and inclusion task force comprised of a cross functional team of associates has created a working charter and is in the process of identifying programs targeting the company's ability to attract develop promote and retain an inclusive workforce.
Our commitment to training to build a high performance organization remains in 2021.
After establishing our vision purpose and values in the fourth quarter, we began to socialize and reinforce them with our leadership.
We've developed a robust program to communicate our messaging around our core values and commitments throughout the organization I'm really excited about what we can achieve as one team aligned around a singular vision.
Moving to improving the customer experience.
In 2021, delivering a seamless omnichannel experience remains a top priority.
With our new digital platform, we are better able to reach our customers with new relevant content, such as how to videos and LLS style home design content showcasing the latest trends.
We will also make sure we have the right people in the right roles.
And the staffing to serve our customers. However, they want to be served from where we will empower our sales associates to leverage our online tools and capabilities in the store.
In the fourth quarter of 2020, we began to rollout new tablets and enhanced Wi Fi capabilities with that deployment largely completed by the end of January.
Sales associates can now better conduct both in person and virtual consultations.
<unk> customers partner with pros and drive install efficiency.
In addition, the tablets further enhance our ability to deliver training across our organization.
We also upgraded the technology in our customer relationship center to a more efficient lower cost support model for our associates to engage our customers.
This technology is key to driving a seamless customer experience across all channels of engagement with our brand.
We have rolled out the new installation portal to all stores and we will be enhancing its capabilities in future quarters.
Turning to our pro customers.
We see an opportunity to win with the pros, who want a wider choice of trend right assortment and a high level of service and expertise that allows them to delight their customers.
Building, our relationships with pros is a key focus.
We recently launched a pilot program in a number of major markets with outside pro account reps to better serve these potential high growth accounts.
In 2021, we will develop and launch programs that make it easier and more compelling for pros to do business with us and we look forward to updating you on future capabilities in upcoming quarters.
I'd like to share. An example of how our stores are elevating their relationship with the pros.
Our new pro Count Rep, Laura Debride Sun reconnected with the pro customer in Denver, who had not shopped with us since 2018.
Discuss the value of <unk> flooring.
The pro had an immediate opportunity for us he was looking for a five and chick free hardwood for our current project.
Denver store manager shown caution provided auctions to Laura on the probe picked his top two <unk>.
Laura ensuring then open the store early indicators of the pros tight schedule during.
During the store meeting they expanded the discussion beyond hardwood to encompass other flooring and accessory options.
In less than a week Laura in the Derma team secured a hickory hardwood order a luxury vinyl plank order and custom order matching stair treads.
Communication with the store customer and lower has been great and the pro is building trust that LLS is the place they should do his business.
He told the store team and Laura that he had another large show coming up very soon.
Laura shown in the Denver store team all stepped up to take care of the pro and they are positive that he will be an active customer in 2021.
This story highlights the opportunity we have to build stronger relationships with pro customers to sell a complete solution and to build repeat business, great work Lora, Sean and team.
Q.
Turning to our objective of driving traffic.
Omni channel capabilities with new tools to help drive traffic and transactions with customers.
Our customers have responded extremely well to a picture of flow final tolls and we've just begun to take advantage of the power of our new digital platform that gives us more agility and speed to better showcase our flooring and services and drive traffic to our stores.
We will continue to invest in our vinyl and hardwood assortments and drive innovation areas, such as water resistant flooring.
With our new website, we can rapidly update new offerings and leverage our omni channel strength to expand our assortment online with exclusive Skus and then look to introduce the most popular skus into our stores.
We will also promote attachment selling of items, such as molding stairs and grills.
We will build on our digital marketing success in 2020.
We will continue to prioritize digital marketing expanding our efforts on search and social where our customers begin the inspiration journey.
In 2021, we will also focus our targeted TV advertising such as HGTV. These.
These efforts will attract new audiences and drive high quality intent driven traffic to L. L flooring dot com.
We can convert into transactions.
As it relates to the rebranding of our stores based on early feedback from customers. We believe the store rebranding will help make our stores more attractive and approachable and we're excited about leveraging our physical store footprint to further reinforce our value proposition.
We're planning a broad scale rebranding of our stores in 2021, and we look forward to updating you on future calls regarding our progress.
Finally, we continue to work on improving profitability.
We are investing in and building momentum around our internal growth initiatives as we execute our transformation strategies.
Given the uncertainty due to COVID-19, we are not providing financial guidance in 2021 at this time.
We would however, like to share some color around the outlook and approach for the year.
The second half of 2020 was a period of substantial expansion in the home improvement sector.
We believe several trends that boosted consumer spending in our category in 2020 will persist early in 'twenty one.
Residential investment existing home sales and rising home prices spud by low interest rates should continue to provide <unk>.
That said there remains a significant number of unknown this year such as risk from renewed shutdowns due to COVID-19, and consumer spending preferences once and if people become more mobile later this year as the vaccine rolls out.
We are watching how installed in pro sales are impacted by customers willingness to have contractors enter their home balancing the net sting behaviors that as a positive for DIY customers.
Visibility later in the year is more limited at this time, but we anticipate that customers may begin to shift some spending away from home improvement or more towards travel less just services in apparel once it becomes safer to leave the home.
We will face tougher comparisons in the third and fourth quarter of 2021.
We also remained focused on the current volatility of international supply chain and domestic hardwood supply with a potential for further disruptions.
We believe we could have captured more sales in the fourth quarter, if a inventories had been higher.
That said our field teams did great work offering customers alternative products are managing inventory flow from our dcs to stores to fulfill orders.
Based on what we know today and barring any further supply chain disruptions, we expect our on hand inventories to be similar from now through the end of the first half of 'twenty 'twenty, one and to increase to more optimal levels of between 270 and $290 million in the second half.
Half.
In the midst of all these cross currents in the operating environment, we are focused on executing our transformation initiatives.
For example, <unk> flooring dot Com digital platform is still new but we are pleased with the new customer growth we are generating a.
Teams are better equipped to improve the customer experience through new technologies and services and we're building momentum in creating a new high performance culture.
Our teams are energized around being the customers first choice and hard surface flooring remaining agile and optimizing our opportunity in an uncertain operating environment.
Turning to gross margin we've done a lot of good work over the past two years to improve our margin.
In 2021, we expect tariffs transportation and raw.
Material costs to be headwinds.
In order to offset these headwinds we will continue to execute our mitigation strategies.
Of reducing our costs through alternative country sourcing.
Partnering with vendors to introduce new products and through enhanced pricing and promotion strategies.
First tariffs.
We will be unfavorably impacted by the reinstatement of 25% section 301 tariffs that went into effect on August 2020.
Leveraging best country sourcing for our entire suite of products across all of our operations remains key to our cost mitigation strategy.
Imports from China at the end of 2020 with 34% down from 46 per cent for the full year 2019.
We are continuing to review the opportunity for best countries sourcing meets our stringent quality standards.
I also want to point out that the global supply chain remains constrained due to the strong demand for inventory during the post COVID-19 recovery.
And tight domestic hardwood supply.
As our suppliers have been impacted by COVID-19.
This could unfavorably impact our gross margins in 2021 from both higher transportation.
And raw material input costs.
We are monitoring transportation costs, both international and domestic.
Contracts come up for renewal this year.
We will look to offset higher sourcing costs through pricing and promotional strategies, while monitoring the market to inform and guide our decisions.
With respect to SG&A in 2021, we will maintain disciplined expense management.
We are really pleased with the effectiveness and efficiency, we are achieving on lower marketing spend given our focus on digital and we feel good about the current level of marketing spend as a percentage of sales.
We plan to leverage the base SG&A expense year over year reinvest expense savings in our growth initiatives, including new technology to improve the customer experience.
<unk> and our teams the opening of new stores and investing in our pro business without pro account Rep program.
These strategic initiatives are expected to deliver appropriate returns for the company based on our internal hurdle rates.
In summary, we're excited about the progress we've made on our transformation initiatives.
And the strong profitability improvements we delivered in 2020.
Team is highly engaged and focused on elevating the customer experience and making allo floor in the customers' first choice and meeting the hard flooring needs.
We've defined our vision values and how we're going to win with our customers and we've got a robust execution plan in place for 2021.
We've also proven our ability to navigate an uncertain macro environment, we will remain agile and disciplined as we execute our plan.
We look forward to reporting on our progress each quarter.
I'll now turn the call over to Nancy to share the financial details of the quarter.
Nancy.
Thanks, Charles and good morning, everyone.
Please note that during my remarks, I will be discussing results on an adjusted basis. Please refer to today's press release for a reconciliation to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful.
In the fourth quarter net sales of $304 $2 million increased $34 million or 11, 1% versus 2019 due to an 11, 2% increase in merchandise sales and a 10, 2% increase in service sales.
Comparable store sales increased 10, 5% versus a year ago, primarily as a result of execution on our transformation and healthy consumer demand for home improvement projects.
We saw a one 6% increase in our average ticket due to higher installation sales and an eight 9% increase in transaction count compared to the same period in 2019.
Gross profit increased 5% in the fourth quarter of 2000 $20 million to $118 million from $112 million in the comparable period in 2019 on higher sales.
Gross margin of 38, 8% in the fourth quarter of 2020 compared to 49% in the fourth quarter of 2019.
During the fourth quarter of 2020 gross margin included a net $2 $2 million benefit from countervailing and anti dumping expense associated with the applicable prior year shipments of engineered hardwood from China compared to a net $400000 expense in the fourth quarter of 2019 when.
When excluding these items from both periods adjusted gross profit for the quarter was $116 million compared to $112 million from the prior year and adjusted gross margin was 38, 1% compared to 41 per cent in the prior year.
Excluding the one time benefit in 2019 from the retroactive exclusion of section 301 tariffs gross margin increased 200 basis points versus the fourth quarter of 2019.
This significant gross margin improvement, primarily reflects merchandising sourcing and cost out efforts and to a lesser extent selective retail price increases.
As a reminder, our financial statements have been impacted by section 301 tariffs on certain products imported from China. In recent years in November 2019, a subset of these imports for certain click vinyl and other engineered products received an exemption that was made retroactive to the inception of the section 301 tariffs in September 2018.
On August seven 2020, this exemption expired.
The August reinstatement of section 301 tariffs on certain products imported from China began to flow through the income statement in the fourth quarter of 2020 as the product was sold.
Cash flow in the fourth quarter was also reduced at the company began to pay tariffs on the products affected by the section 301 tariff reinstatement.
SG&A expense for the fourth quarter with $99 6 million or 32, seven per cent of sales leveraging 110 basis points compared to $92 6 million or 33 eight per cent of sales in the fourth quarter of 2019.
SG&A in both quarters included certain costs related to legal matters.
Additionally, the fourth quarter of 2020 included $1 2 million of costs related to Canadian and U S store closures, bringing the total to $3 $8 million on the year.
As anticipated all 14 stores were closed by yearend, although certain cleanup activities will be completed in early 2021.
When excluding these items from both periods.
Adjusted SG&A expense for the quarter with $97 million.
$4 million higher versus $93 million in the fourth quarter of 2019, due primarily to higher bonuses and commissions on strong financial performance.
As a percentage of sales SG&A leveraged 200 basis points to 31 nine percentage of sales from 33, 9% of sales in the fourth quarter of 2019.
For the quarter, we delivered operating income of $18 4 million compared to $19 $3 million in the fourth quarter of 2019.
Adjusted operating income in the fourth quarter of 2020 was $18 $8 million this compared to adjusted operating income of $19 $4 million from the prior year period, when we reported an $11 million one time benefit due to the retroactive exclusion of tariffs.
Excluding that nonrecurring events in 2019, the significant year over year improvement was primarily driven by higher net sales merchandise sourcing and cost out efforts and selective retail price increases and SG&A leverage in 2020.
In the fourth quarter of 2020, we had other income of $68000 compared to other expense of half a million dollars for the three months ended December 31st 2019.
Both years reflected interest on borrowings on our credit agreement and the.
The interest expense on borrowings in 2020 was offset by a favorable adjustment of $1 $2 million from the reversal of interest expense associated with anti dumping and countervailing duty rate changes.
In the fourth quarter after determining that the company was no longer in a consolidated three year cumulative loss position, we partially released the valuation allowance recorded against most of our U S deferred tax assets.
As a result, we recognized an income tax benefit in the fourth quarter of $12 $6 million.
This was driven by the partial release of the valuation allowance of $19 $6 million and year end deferred tax true ups, including the impact of the cares Act.
The release of the valuation allowance in Q4 has no impact on future cash taxes, our effective tax rate.
For the fourth quarter of 2020 net income increased by $14 7 million to $31 1 million compared to net income of $16 4 million for the fourth quarter of 2019.
Finally earnings per diluted share with $1 five for the quarter versus earnings per diluted share at 57 in the year ago quarter.
On an adjusted basis fourth quarter earnings per diluted share of $1.06 compared to 57 for the fourth quarter of 2019.
Recapping, our full year results total net sales increased $5 million to $1 1 billion in 2020.
This represented a strong second half performance following the COVID-19 disruption in our second quarter.
Operating income increased $40 million to $56 million and adjusted operating income was up $39 million to $64 million.
2020, adjusted operating margin was five 8% up 350 basis points from two 3% in 2019.
The higher operating income reflects good progress on our profit improvement initiatives with our merchant and sourcing teams implementing strategies to improve gross margin.
Our marketing teams deploying more efficient and effective digital marketing spend and our overall organization driving disciplined expense management.
We had other expense of $2 $6 million and $3 $8 million for the years ended December 31, 2020, and 2019, respectively.
The expense in both years, primarily reflected interest on borrowings under our credit agreement.
The expense related to borrowings in 2020 was partially offset by a favorable adjustment of $1 $2 million reported in the fourth quarter of 2020 per the reversal of interest expense associated with anti dumping and countervailing duty rate changes.
For 2020, we reported an income tax benefit of $7 8 million, which represented an effective tax rate of negative $14 five per cent.
Excluding the released at the valuation reserve in the cares Act impact income tax expense for 2020 would have been $13 $6 million, which represented an effective tax rate of 25, 3%.
For the prior year, we recognized income tax expense of $3 $3 million, which is an effective tax rate of $25 four per cent.
Net income was $61 $4 million or $2.10 per diluted share in 2020 compared to net income of $9 7 million or 34 cents per diluted share in 2019.
On an adjusted basis 2020 earnings per diluted share of $2 from 28 cents compared to 54 cents for 2019.
Net income and diluted earnings per share for the fourth quarter and full year 2020 benefited from the partial release of evaluation reserve of $19 $6 million.
Turning to the balance sheet.
Inventory at the end of the fourth quarter was $244 million up from $237 million at the end of September and compared to $286 million at the end of 2019.
The 15% year over year reduction in inventory was primarily driven by managing our inventory purchases as a direct result of COVID-19, followed by supply chain constraints on replenishment and strong second half sales that kept inventory below our targeted level for year end.
Our teams are working diligently to receive new inventory in the face of supply chain disruption as of January 31 inventory was $243 million and we are working to increase inventory to a more optimal range of 270 million to $290 million in 2021.
Our balance sheet is strong we ended the quarter with cash and cash equivalents of $170 million up from $9 million at the end of 2019.
Net cash provided by operating activities was $157 million for 2020 compared to 300000 in 2019.
The increase was driven by strong operating performance along with our disciplined working capital management program and temporary adjustments as we navigated the COVID-19 environment.
And as business rebounded in the second half, we did not replenish inventory to optimal levels due to supply chain constraints, which also contributed to our above average customer deposits in accounts payable during 2020.
He's working capital factors favorably impacted our cash flow from operations in 2020.
Also several non recurring activities generated a net $13 million increase in cash in 2020.
These included collection of the tariff recovery receivable the deferred payroll taxes associated with the cares Act and insurance settlements, which were offset by the payment of legal matters and settlement.
At December 31, 2020, we had $214 million in liquidity comprised of $170 million of cash and cash equivalent and $44 million of excess availability under the credit agreement.
This represents an increase of liquidity of $103 million from December 31, 2019.
At yearend, we had $101 million in debt outstanding under our credit agreement, which is unchanged since we announced our ABL Amendment in April 2020.
Despite our strong current position uncertainty in the near to medium term environment will require a sustained focus on maximizing liquidity.
As a result, we have chosen to maintain a high cash balance at this time to provide financial flexibility as we manage through the current uncertain environment. We will continue to review this decision each quarter.
Turning now to 2021.
Our team remains dedicated to our transformation driving growth and improving profitability. We are pleased with our ability to manage costs and maintain a strong and flexible balance sheet. During these uncertain and challenging times.
As Charles noted uncertainty surrounding the duration and extent of the COVID-19 pandemic makes it uniquely challenging to accurately forecast our future financial performance.
As a result, we are not providing annual financial guidance for 2021.
I can however, expand on some of the details that Charles touched on at a high level.
From a sales perspective, we are planning to open 12 to 15 stores in 2021 versus closing net nine stores in 2020.
Barring any COVID-19 related shutdowns, we expect installation sales to return to a pre COVID-19 mix in 2021, as we execute our initiatives to attract more customers and as our customers are more comfortable having people into their homes.
This will benefit gross margin dollars, but lowered the gross margin rate.
With respect to SG&A, we plan to continue our expense management efforts and to invest behind our growth initiatives, including new technology in store service level to improve the customer experience as well as opening new stores.
As we demonstrated in 2020, if we see is to be a downturn due to a widespread COVID-19 shut down we have the ability to adjusted accordingly, and very quickly reduce our expenses.
Well I cannot comment on a normal run rate for SG&A in 2021, I'd like to review several one time events that impacted our SG&A in 2020.
Recall that in the second quarter in response to COVID-19, our adjusted SG&A expense was reduced by $16 million versus 2019, primarily due to lower advertising expense as we reduced our promotional cadence in response to the Covid crisis.
But also due to significantly lower payroll and benefits to align staffing with demand and temporary salary reduction for the corporate office personnel and the board.
In the third quarter of 2020, our SG&A expenses were favorably impacted by a $2 $5 million benefit from the final settlement of the business interruption insurance claim related to the August 2019 network security incident, partially offset by $1 $8 million of store closure costs.
And in the fourth quarter of 2020, a higher SG&A expense versus 2019 included $1 $2 million of store closure costs and higher variable expenses related to stronger financial performance.
I Hope this gives you a better sense of some of the impacts to our SG&A in 2020.
For the full year of 2021, we expect our effective tax rate will be approximately 25%, which reflects the statutory rate.
In short we remain focused on our profitability initiatives, we will work to reduce sourcing costs and improved pricing strategies to battle increased gross margin headwinds in 2021.
And we are diligently managing expenses and investing behind our growth strategies that will position us as the customers first choice and hard surface flooring with the ability to adjust to the macro environment that's needed.
Our balance sheet and liquidity are strong, giving us the ability to invest in our growth initiatives in 2021.
From a cash flow perspective in 2021, we expect working capital to return to more traditional levels.
We plan to increase our inventories to between 270 and $290 million and we expect our customer deposits will return to more historical levels.
In 2020, our Capex spend was $16 million and in 2019, it was $20 million.
In 2021, we currently expect Capex investments of up to $24 million to $28 million as our overall business results support the broad scale rebranding of our store fleet. The opening of 12 to 15, new stores and investments in digital.
As Charles stated our entire organization remains focused on continuing to execute our transformation initiatives to ultimately drive profitability. We are looking to maximize the financial and operational flexibility in an uncertain environment as we execute against our strategic initiatives.
Thank you all for your time this morning with that I'll ask the moderator to open the call to questions.
Okay.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star two if you'd like to remove your question from the queue.
Participants using speaker equipment.
It may be necessary to pick up your handset before pressing the starkey.
In the interest of time, we ask that you need to keep to one question.
Our first question comes from the line of Laura Champine with loop capital markets. Please proceed with your question.
Thanks for taking my question can you dig in a little more to the supply chain issues that Rob just a little bit of sales growth in Q4, and sort of talk about the pathway to fixing those.
Yes, Laura.
Many people have commented the we cut back on a significant amount of inventory as well as the Covid crisis enrolled.
Obviously to protect liquidity and we felt that that was the right thing to do and of course that's.
It's reflective across many industries that you can see where there are shortages of raw components and.
So that definitely drove a capacity constraint issue on containers, particularly out of Asia.
And so we work our contracts with our with our carriers and we will start to see that repair as we move through the first half of the year.
Also a lot of the mills were impacted in the production of lumber and so on the solid domestic side. There is a tight availability on raw materials. So there's really two drivers one on the international freight, particularly coming from Asia to both the West coast on the East coast and raw materials. So.
She said, we expect to get back to a more typical inventory levels in the back half of the year, but we do expect some some headwind for the balance of the front half of the year.
Got it and this is just housekeeping I may have missed it in nancy's comments, but can you give us the average sale in Q4.
The average sale was just under $1400.
Got it thank you.
Thank you. Our next question comes from the line, Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
Nice quarter.
The question I wanted to ask.
Charles.
You spent a lot of time talking about the opportunity.
The average of lumber liquidators proportion to grow.
Step back.
The biggest gating factor is the adjusted.
So to say cultural and effort on the part of your company and your stores or are there are there is there something more but it was gonna take investment whether it's from a system standpoint, or some other type of infrastructure spend.
Hey, Yeah, good morning, Brian.
So the answer that question, Brian is we think it's both.
We clearly have got to move our culture from this very high low sales transactional experience with pros to our relationship with pros every day that we're they're answering the phone are meeting their needs and being able to offer.
Specialized service that they don't find than necessarily another retail environments, but we have also got to build capabilities. We started with a trial scale and retention program that has backend reporting that allows our field leadership to be very specific in terms of one <unk>.
Standing this segmentation of our pros and how we connect on the day to to see the progress, we're making with those pros and as I said in my remarks, there are the <unk>.
Areas of value proposition that will be building through the year.
To make it easier for pros to be able to transact with us in a relationship fashion.
That helps.
That's very helpful. And then if I could just slip another one yet.
From what I'm asking a lot of my company in my.
Covered companies. This question, but if you look at the.
The results reported fourth quarter again, very very strong and clearly indicative to a certain extent.
Aperture taken but how much do you think.
Overall environment and this continued COVID-19 environment has helped sales at your company.
Yes, that's a great question when we look at on a regular basis and I think Dr.
The answer to that question as you know as we think about taking share.
The long term with still a highly fragmented independent space 60 per cent of the market is still highly fragmented.
Clearly there is a tailwind from our home improvement and again, we're watching very carefully there are both positive tailwind I think out there from a housing an interest rate perspective, and then potentially a negative based on what's happening with COVID-19, but we've got solid foundational growth work going on on our agenda is weather.
Our new digital platform the.
The investments, we've been making digitally and in store, which is really helping our teams be more productive.
But we are doing foundational and pro and then of course you know.
As we move through this year, a whole brand revitalization has been a critical element of repositioning us as a hard surface specialty flooring company versus a company that's got a name lumber liquidators.
There's a balance that Brian.
That's very helpful. I appreciate all the color. Thank you.
Thanks, Brian.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.
Thanks, a lot and good morning, my question's around tariffs what percentage of your sales were impacted by that Reed you did higher tariffs in the fourth quarter and as we looked at 2021 do you expect all of your sales can be impacted by day.
So as we mentioned in our remarks.
Excluding a $13 million benefit from the retroactive exclusion of the tariffs in Q4 of last year, our gross margin rate expanded 200 basis points that said the impact of our weighted average cost accounting, we expect to see a bigger headwind from the reinstatement of the 25 per cent tariffs in Q1 going forward, we are continuing to pursue our mitigation.
<unk> strategies, leveraging best country sourcing, which remains key to our mitigation strategy as we noted our imports from China were down to 34 per cent compared to 46% during the full year of 2019.
So we're working with vendors to launch new projects products excuse me and we're also looking to offset higher sourcing costs through pricing and promotional strategies, while we monitor the market.
To inform and guide our decisions going forward.
So just to follow up on that.
Less than 34 per cent, Andrew sales were impacted by the higher tariffs in the fourth quarter and in first quarter 'twenty, one and beyond should we be thinking about 34% or significantly lower number than that.
We are not going to break out anything further for 2021.
Indicating is that there is not a theres going to be a greater impact Q1 going forward because of the way that we account for.
You know the product and the tariffs hitting it so we had tariffs in Q4, but you won't really see the impact of that until Q1 going forward.
And Seth let me just saw us as I said in my remarks, right, we're really looking at our.
Our ability to continue to look at alternative country sourcing, but we're also looking at government policy and what will happen long term to the tariff environment, what will happen with trading in China and there was a lot of discussions going on with vitamins administration today will that'd be a change and so that doesn't put us on pause in terms of continuing to find quality.
Quality supplies in in different tariff environment countries.
Understood. Thank you very much.
Thanks Seth.
Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.
Hi, Thanks, good morning, everyone.
So Charles you had talked about would be the 'twenty rebranded store test that day.
You were seeing it.
I guess, some qualitative measures of being more approachable more relevant.
Is there any quantitative metrics you could give us specifically was there any notable change in same store sales versus the non rebranded stores.
And then with the broader rebranding effort.
A high level, what does that look like over the next couple of months here.
Yeah, Peter Thanks for the question Great question. So.
As we think about where we're positioning our brand.
The launch of our New website for example is focused on Hello flooring.
We will start to translate down through the search environment for example, where customers will see hello, flooring and that will continue to intensify.
As we move through the year as I said in my remarks, we are intending to start a broader rollout of the rebranding of our stores.
Because it was both qualitative and quantitative against the control stores, we were happy with the results that we're seeing and we believe that the driving this brand evolution over the next 12 to 18 months.
Will make us more relevant in the marketplace. You know the feedback we got from customers was a perception of quality of air.
Expertise and and traffic results.
Reflected that and so again, it's a longer journey, it's not just the next two months Peter we see this as being part of that transformation and part of our work over the next 18 months.
Okay. That's helpful and then.
I know you're not providing any.
<unk>.
So maybe some guardrails, we'll call it but how should we think about overall gross margin there does seem to be some notable puts and takes with the tariffs transportation and then and then your ability to adjust pricing is there any way that gross margin would be up this year or are the headwinds to extreme.
Again.
Not really giving a specific detail in terms of gross margin. We're just indicating that there are headwinds both related to tariffs as well as some of the transportation disruptions that Charles talked about but you know coming into or coming out of Q4, we had a 200 basis point improvement compared to 2019, so our mitigation strategy.
These that Charles mentioned are showing.
Good work in terms of particularly our country sourcing, but as well as we work with vendors to launch new product project products I cannot get that word out excuse me and [noise] offsetting.
Offsetting the higher sourcing costs through pricing and promotion strategies that will monitor the market. So there's a number of headwinds in tailwind and.
We're just moving forward without mitigation strategies.
Okay. Thank you and good luck.
Thanks Peter.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Tyson for final comments.
Thanks, everyone for joining us today again I want to thank all of our associates for everything they're doing.
Help us in our business during these difficult times I want to reiterate that we're excited by the strong sales growth from profit performance in 2020.
Our confidence in our transformation strategy and our ability to quickly adapt to this dynamic operating environment environment wishing everyone. Good health and safety and we look forward to talking to next update. Thank you have a great day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.