Q4 2021 LL Flooring Holdings Inc Earnings Call
Thank you.
Okay.
Thank you.
Yes.
Okay.
Yes.
Yes.
Okay.
Thanks.
Yes.
[music].
Yes.
Yes.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
[music].
Good morning, good afternoon, and welcome to the Allo flooring fourth quarter 2021 results Conference call. My name is Adam and I'll be your operator today, if you'd like to ask a question during the Q&A portion of today's call reduced sugar pressing star one on your telephone keypad I will now hand, you over to Julian the meeting from Investor Relations to begin so Judy. Please go ahead when you're ready.
Thank you operator, good morning, everyone and thank you for joining us.
Today, I am 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.
Right.
Although <unk> believes that the expectations reflected in its forward looking statements are reasonable.
It 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 <unk> 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 are discussed in today's earnings release.
In addition, during today's call we will be discussing our financial performance on both a one and two year basis.
Because we believe that two year presentation is helpful to investors to understand the tour underlying trends in our business.
Given the volatility of the business in 2020 related to the effects of COVID-19 on consumer spending.
The information contained in this call is accurate only as of the date discussed.
Investors should not assume that the statements will remain operative aka today.
<unk> undertakes no obligation to update any information discussed in this call.
Now I am pleased to introduce president and CEO Charles Tyson Charles.
Thank you Julie.
Morning, everyone.
I'm very proud of all that our associates accomplished in 2021 to deliver comparable store sales growth of five 2%.
And excellent service to our customers, helping them find the floors that they love.
Today, we're excited to share our vision for growth over the next three years.
We're targeting net revenue of $1 5 billion by 2024, representing a 9% CAGR from 'twenty one to 24.
We also expect to deliver expanded operating margin by 2020 for creating significant value for our stakeholders.
Today's call will cover our 2021 performance.
Briefly touch on our 2022 outlook dedicate most of my remarks to a three year growth plan and the strategies, we're focused on to achieve it.
Today, we shared that our board approved increasing our share repurchase program authorization to $50 million.
Underscoring strong confidence in the long term growth potential for our business as well as the financial flexibility, we have created to invest in growth and return capital to our shareholders.
Now I'd like to share 2021 performance highlights and.
In 2021, we made significant progress on our transformation initiatives.
Through our team's effort, we posted record sales to pros.
<unk> delivered record installation services revenue.
Grew total net revenue, 5% and comparable store sales five 2%.
<unk> had a large network of global sourcing partners to launch new innovative product that made significant progress in the transition of our brand repositioning.
Hello Flora.
2021 marked the second consecutive year of unprecedented macroeconomic disruption, which included supply chain constraints accelerated inflation.
Labor shortages and the continued impact from the COVID-19 virus.
I wanted to recognize the incredible work that our great teams in the field and distribution centers have done throughout 2021, and this year to continue servicing our customers as well as building stronger relationships, helping our customers keep their projects moving forward, while facing unprecedented headwinds.
Driven by the impact of Covid.
Our merchant teams have driven strong outcomes through our sourcing pricing and promotion strategies and as such we absorbed over 500 basis points of higher cost of goods in 2021 to deliver adjusted gross margin of 37, 6% down only 120 basis points from 2012.
<unk> and up 60 basis points through 2019.
Disciplined expense management held in 2021, adjusted SG&A as a percent of net revenue flat to last year and down 170 basis points from 2019.
Even as we increased investments in our field organization and advanced our growth strategies.
We delivered adjusted operating income of $53 7 million or four 7% of net revenue delivering on our commitment to significantly improve profitability over the past two years with that 2021, adjusted operating income up $29 million and adjusted operating.
And up 240 basis points compared to 2019.
Our balance sheet is strong we repaid all of $101 million of our debt and we ended the year with total liquidity of $227 million.
Insured in 2021.
Team battled a dynamic and challenging macro environment to meet or exceed our customers needs deliver.
<unk> delivered strong financial results and position us to support our long term growth strategies.
Turning now to our fourth quarter results. We were pleased to report another quarter of record sales to pro customers and record fourth quarter services revenue as.
As we communicated on our last call consistent with the third quarter, we saw a decrease in sales to DIY customers, which pull total comparable store sales down.
We were not happy with our DIY sales performance, while we anticipated tough comparisons to the Covid nesting phenomenon last year. We also believe our lower DIY sales were impacted by less than optimal inventories. We are focused on increasing sales to old customers.
In 2022, and I will discuss our strategies later.
Nancy will discuss the fourth quarter results in more detail.
Turning to 2022.
In the first half of 2022, we continue to navigate supply chain constraints and cost increases.
Store staffing challenges related to the COVID-19, Berry and consumer spending headwinds of inflation and last year's stimulus.
However, we remain confident in improving our net sales growth as the year progresses, and we are focused on executing our long term strategic growth plan.
Nancy will review, our 2022 outlook in more detail.
What I'd like to emphasis is 2022 marks a year of investment and six core growth strategies that will help us achieve our accelerated net sales growth and increased profitability goals by 2024.
Our goal is to transform L O flooring into the leading destination for hard surface flooring by improving the customer experience driving traffic and transactions improving profitability and developing a strong values driven culture.
Over the last two years, we have established a strong foundation of transformational work that has positioned us to now focus on driving accelerated net revenue.
And profitability growth we.
We strongly believe we offer a compelling value proposition to customers as we provide a wide selection of high quality stock products and the accessible flooring expertise and service of a local store with the scale omnichannel convenience and the value of a national chain.
We're confident in our team's ability to execute on the growth opportunity ahead, and we're looking forward to achieving our vision to establish Ll flooring as a leading destination for hard surface flooring.
Now I want to share more details about the six core growth strategies, we are investing in that will position us to achieve our three year plan.
Accelerating new store openings.
Growing sales to pros.
Broadening awareness for the Allo flooring brand.
Improving the customer experience to deliver on the brand promise.
Innovating, new products and driving our people and culture initiatives.
First accelerate new store openings.
<unk> new stores is an important strategy that will help us both increased convenience.
And build awareness for the low flooring, Brad our plan for 2022 is to open 20 to 25 new stores.
And our standard format, which is an intimate 500 square foot showroom.
With unattached five to 6000 square foot warehouse with deep in stock inventory relatively available for our customers.
We are well underway with four new stores already opened to date this year.
We are targeting new white space markets.
And existing markets, where we are under stored relative to that market potential.
We are excited about launching accelerated number of new stores in 2023, and 24 with a target total of 100, new stores opened over the next three years.
Second gross sales to pro customers.
Sales for pro customers are a key component of our long term growth strategy and we are in the early innings of addressing this large market opportunity in.
In 2021, we posted record sales for pros due to solid execution on our multi pronged strategy.
Pro relationship program continues to drive greater pro customer retention and higher sales pro customers.
As we announced last quarter, we are pleased with the results from our outside pro account sales Rep program.
We expect to nearly double the number of pro account reps in 2022 to better serve our pros.
<unk> value add dedicated everyday pro pricing and for our websites that make it easier for them to do business with us.
The website showed some everyday competitive pricing and allows them to extend that pricing to their customers. The.
The web experience also gives pros have real time access to inventory levels across stores as well is that job histories.
This dedicated web experience allows pros to conveniently buy online and pick up from their local store.
A wide assortment in stock trend rate floors.
In 2022, we will build on these services to increase sales with growth. We will also execute a more personalized pro marketing strategy to communicate our value proposition.
Moving to our third strategic growth driver broaden awareness of the Ll flooring brand.
We are on a long term journey to build brand equity and awareness and establish <unk> flooring as the leading destination for hard surface flooring. We are pleased with the positive feedback, we're receiving from pros and homeowners about a new brand.
Research shows that consumers perceive ll flooring as superior to lumber liquidators and each of the brands that we measure such as expertise product quality and style.
We have a strong marketing plan to build awareness for the <unk> flooring brand and we're excited about the new brand as a catalyst for growth.
We will also build awareness through the store rebranding and new store openings.
Our rebranded stores features lighter into areas and clear signage, helping customers select from our extensive offering of trend right floors.
And we plan to build on a breakthrough marketing campaign, <unk>, which underscores our end to end solution from inspiration to installation and elevates our brand perception.
We will evolve <unk> to continue to speak to our core value propositions of supply and quality hard surface flooring and providing high touch expert service.
We will tailor our messaging by channel and customer segment to drive activation.
The fourth strategic growth driver is improving the customer experience to deliver on the brand promise.
The three key elements of our customer experience strategy the in store experience.
The digital experience.
And the installation experience.
Starting with the in store experience, we believe a key competitive advantage is the high touch service and expertise we provide in our stores as reflected in our continued investment in our associates and training programs.
When a customer walks into one of our stores, they're immediately greeted by one of our possible flooring experts and our intimate and easy to shop showroom setting.
Great feature in our new stores is our interactive design center.
Our store associates can collaborate with retail consumers and pros using a picture at flooring visualize a digital tool.
Next the digital experience.
We are continuously improving ll flooring dot com digital experience for customers.
Over the next three years, we plan to position <unk> flooring as the go to expert and flooring through our comprehensive omnichannel experience spanning our website customer relationship center and stores, providing digital tools and content to guide customers on their journey to select the plastic floor.
Is integral to our digital strategy.
Customers, who use our picture and floor finder tools are more likely to complete their purchase online or to enter our stores more educated and ready to purchase than ever before.
We plan to continue to innovate these digital tools as well as create more educational inspirational content.
<unk> customers through that journey.
Next the installation experience, which is one of the most important customer experience touch points.
We believe a seamless end to end solution from inspiration to installation.
Is a strong competitive advantage because homeowners can come to us and get matched with a quality installation team through our broad network of professional independent contractors.
In 2021, we posted record services sales, primarily driven by installation due to both traction on internal initiatives and consumers being more comfortable with professionals in their home.
We plan to continue to enhance technology to make the installation process is seamless fast and easy as possible for customers associates and contractors alike.
The fifth growth strategy is innovating new products, we believe a key competitive advantage for us as a leading assortment of over 500 high quality on trend hard surface flooring skus.
One of the most important investments and transformations, we've seen over the past two years is the expansion of our merchant and sourcing teams. We've evolved from reacting towards suppliers have to offer so proactively identifying trends driving innovation to create exclusive product offerings and then selecting.
The best sourcing providers around the globe to deliver on our vision.
We see an opportunity to further innovate our trend right portfolio to be a leading destination for our customers.
The biggest new product launch of <unk> 21 was <unk>, which is sourced from Europe represents a new industry, leading premium a hybrid resilient flooring category.
<unk> offers dual defense waterproof performance is dense and scratch resistant and as eco friendly and easy to install we.
We are very pleased with the continued strong sales of <unk> and we're excited about the opportunity to expand this brand.
Now I'd like to speak about our strategy driving our people and culture initiatives.
I'm excited to share today, the strengthening of our senior leadership team with the newly created position of executive Vice President and Chief growth Officer.
On February 9th Michael Dell Bowman joined US in his new role is a dynamic leader, who has built and transformed digital first marketing and e-commerce capabilities across travel hospitality and manufacturing.
Most recently Michael served as the Chief Digital Officer, and head of 600 company owned entities of the Goodyear tire <unk> rubber company, where he was responsible for building the digital capabilities of the organization and identifying new initiatives to grow the company's direct to consumer business.
Michael will be responsible for leading and accelerating our growth agenda with responsibility for the omnichannel customer experience.
Brand repositioning in marketing and e-commerce .
Welcome Michael.
Our people are critical to achieving our goal to become the customers' first choice in hard surface flooring.
We believe engaged employees aligned with our values are critical to meeting our strategic growth objectives, and delivering outstanding service to our customers.
Every associate across our organization is encouraged to embrace our corporate values.
In 2021, we reinforced our purpose vision and values throughout our organization and we made great strides on our career development training and diversity equity and inclusion initiatives.
We promoted over 500 associates across our organization.
Lamented a new learning management system called <unk> Academy, delivering significant training in the field.
When we conducted diversity equity and inclusion training for our top leadership.
We also developed plans to expand the dei training throughout the organization this year.
We continue to strengthen our position as an employer of choice.
<unk> offering competitive wages and benefits for our stores and distribution centers.
We're excited about how our six strategic growth drivers.
Accelerating new store openings growing sales to pros.
<unk> awareness of the L L flooring brand.
Improving the customer experience to deliver on the brand promise.
Innovating new products, driving our people and culture initiatives will position us for accelerated top line.
And profitability growth over the next three years.
In summary in 2021, we delivered record pro and installation service sales and demonstrated strong sales and profitability improvement on a two year basis.
We also diversified our large network of global sourcing partners to launch new innovative products and position ourselves well for the future. These results reflect the agility of our team and the transformative progress we've made.
In 2022, while we continue to navigate a challenging macroeconomic environment, we're confident in improving our net sales growth as the year progresses.
The investments, we're making in 2022 are critical to positioning us to achieve our three year growth plan.
We believe we offer a unique value proposition to customers and we're excited about our vision for growth over the next three years.
We're targeting net revenue of $1 5 billion by 2024, representing a 9% CAGR from 2221% to 2024, coupled with expanded operating margin.
<unk> strong cash generation.
Our board recently increased our share repurchase program to $50 million, reflecting their confidence in the long term potential for our business as well as the financial flexibility, we have to invest in growth and return value to our shareholders.
We're excited about the growth opportunity ahead, and our ability to position <unk> flooring as the leading destination for hard surface flooring.
I will now turn the call over to Nancy walls to share our financial details and outlook.
<unk>.
Thanks, Charles Good morning, everyone.
Before I begin I'd like to make sure everyone knows that I'll be discussing non-GAAP adjusted numbers today, which eliminate certain items that are not indicative of our core business results.
Please refer to our fourth quarter results press release for more detail.
During the fourth quarter of 2021, we were very pleased to post double digit growth in sales to pro customers and a six 4% increase in net service sales, reflecting continued momentum with pro and installation customers as we increasingly benefited from our strategic initiatives.
However, as we anticipated and shared with you last quarter. The decrease in our sales to DIY customers hold total net sales and comparable store sales down for the quarter on a one year basis.
Both the third and fourth quarter, we faced tough comparisons versus the strong DIY nesting phenomenon in 2020.
We also continued to be constrained by less than optimal inventory, particularly in some of the best selling categories within hard surface flooring.
Total inventory improved $10 million versus last year to $254 million as we continue to rebuild inventories to optimal levels to best serve our customers.
<unk> inventory in transit increased by $18 million versus last year as a result available inventory per store decreased two 7% compared to December 31 2020.
While total inventory improved we believe inventory constraints at the store level and the most popular skus had a larger impact on potential missed sales in the fourth quarter and in previous quarters.
Encouragingly, we are pleased with the increasing inventory this quarter and we expect to return to optimal levels by the end of the second quarter of this year.
<unk> there are no additional disruptions to the supply chain during that time.
Turning to our detailed financial results we.
We believe our two year performance provides a better indication of the underlying strength of our business given the impact of COVID-19 on consumer spending and a continued challenging supply chain environment.
During my discussion I will review fourth quarter results on both a one and two year basis.
In the fourth quarter net sales of $285 $3 million decreased $18 9 million or six 2% versus the fourth quarter of 2020.
This was due to an eight 1% decrease in net merchandise sales.
Partially offset by a six 4% increase in net services sales.
We saw an 18, 5% increase in our average ticket, reflecting a greater mix of installation sales, which grew to 13% of net sales from 11% in the fourth quarter of 2020 as well as a higher merchandise average ticket driven by pricing and promotion strategy as well as favorable product mix as we sold.
More hardwood and launched our new <unk> brand.
A 25, 2% decrease in transaction count compared to the same period in 2020, reflecting the decrease in sales to DIY customers.
When compared to the fourth quarter of 2019 net sales increased four 2% driven by two 2% higher merchandise sales and a 17, 2% increase in net services sale.
Average ticket improved 24% and transactions decreased 16, 6% due to lower DIY sales.
Fourth quarter 2021 comparable store sales decreased six 7% versus the fourth quarter of 2020, but increased three 8% on a two year stack basis.
Turning now to gross profit.
Gross profit was $106 8 million in the fourth quarter of 2021 compared to $115 $8 million in the fourth quarter of 2020, and $112 3 million in the fourth quarter of 2019.
Adjusted gross margin was 37, 4%.
38, 1% and 41% for the fourth quarters of 2021, 2020, and <unk> thousand 19, respectively.
The 70 basis point decrease in fourth quarter 2021, adjusted gross margin versus 2020, primarily reflects significantly higher material and transportation costs, which were collectively up more than 800 basis points that we were able to partially mitigate through pricing promotion and alternative country and vendors.
<unk> strategy.
Compared to 2019, adjusted gross margin decreased 360 basis points.
However, in the fourth quarter of 2019, we recorded a one time benefit of approximately $13 million for the retroactive exclusion of section 301 tariffs <unk>.
Excluding that benefit adjusted gross margin increased approximately 130 basis points, primarily reflecting our pricing promotion and I'm trying to country and vendor sourcing strategies at more than mitigated higher material and transportation costs.
Adjusted SG&A expense for the fourth quarter of 2021 was $96 million compared to $97 million in 2020, and $92 9 million in 2019.
As a percent of net sales adjusted SG&A for the fourth quarter of 2021 was 33, 7%.
An increase of 180 basis points from the fourth quarter of 2020 due to increased investment in customer facing and distribution center personnel that was largely offset by lower bonuses and commissions as well as deleveraging on lower net sales.
When compared to 2019, adjusted SG&A decreased 20 basis points on higher net sales.
Adjusted operating income in the fourth quarter of 2021 was $10 8 million compared.
Compared to $18 8 million for the prior year period, due primarily to tough comparisons to the nesting phenomenon in 2020 and gross margin headwinds in 2021.
Adjusted operating income in the fourth quarter of 2021 was down $8 $6 million from the fourth quarter of 2019, when we reported and approximately $11 million one time benefit due to the retroactive exclusion of tariffs.
Adjusted operating margin for the fourth quarter of 2021 was three 8% a decrease of 240 basis points from six 2% in the fourth quarter of 2020.
Adjusted operating margin decreased 330 basis points from seven 1% in 2019.
Excluding the approximately $11 million, one time benefit to the retroactive exclusion of section 301 tariffs in the fourth quarter of 2019, adjusted operating margin increased approximately 100 basis points compared to 2019.
In the fourth quarter of 2021, we reported adjusted other expense of $104000 compared to adjusted other expense of $1 2 million for the three months ended December 31 2020 the.
The decrease was driven by lower interest expense as a result of the repayment of all outstanding debt during the second quarter of 2021.
In the fourth quarter of 2021, we recognized income tax expense of $474000 or an effective tax rate of four 4%.
Excluding the impact of recognizing a $2 $4 million benefit for state net operating loss adjustment income tax expense for the fourth quarter of 2021 would have been $2 9 million, which represented an effective tax rate of 26, 8%.
This compared to an income tax benefit of $12 6 million or an effective tax rate of negative 68, 5% for the fourth quarter of 2020, driven by the partial release of the valuation allowance and yearend deferred tax true up including the impact of the cares Act.
Excluding special items income tax expense for the fourth quarter of 2020 would have been $3 6 million, which represented an effective tax rate of 19, 6%.
For the fourth quarter of 2019, we recognized income tax expense of $2 4 million, which reflected an effective tax rate of 12, 9%.
Adjusted earnings for the fourth quarter of 2021 of $10 $2 million decreased by $22 million compared to the fourth quarter of 2020, due primarily to last year's partial release of valuation allowance on deferred tax assets of $20 million.
As well as tough comparisons to the nesting phenomenon in 2020 and gross margin headwinds in 2021.
Adjusted earnings for the fourth quarter of 2021 decreased $6 $2 million from 2019, which included the after tax approximately $8 million, one time benefit from the retroactive tariff exclusion.
Adjusted earnings per diluted share up 35, compared to adjusted earnings of $1 three for the fourth quarter of 2020, and adjusted earnings of 57 and 2019.
Recapping the full year 2021 results.
Net sales of 115 billion increased 5% compared to last year, and five 5% compared to 2019 with both increases driven by double digit growth and sales to CRO customers and net services sales that more than offset a decrease in DIY Sam.
Adjusted operating income of $53 $7 million in 2021 decreased $9 9 million from 2020 due to higher SG&A dollar spend that more than offset higher gross profit dollars.
Adjusted operating margin of four 7% decreased 110 basis points compared to last year the.
The decrease in adjusted operating margin versus last year, primarily reflects lower adjusted gross margins due to higher transportation and material cost as well as paying 25% section 301 tariffs on certain flooring products imported from China for our full year compared to approximately five months in 2020.
That said on a two year basis, adjusted operating income increased $29 million and adjusted operating margin expanded 240 basis points.
Two year improvement reflects higher net sales disciplined SG&A management and improvement in gross margins as our team more than mitigated increased materials transportation and tariff costs.
Adjusted other expense of $1 $7 million in 2021 decreased $2 2 million compared to 2020 as a result of repayment of all outstanding debt during the second quarter of 2021.
For 2021, we reported $11 1 million of income tax expense, which represented an effective tax rate of 21%.
Excluding the impact of a $2 $4 million benefit for state net operating loss adjustment recognized in the fourth quarter of 2021 income tax expense for 2021 would have been $13 5 million, which represented an effective tax rate of 25, 6%.
This compared to an income tax benefit of $7 $8 million in 2020, which represented an effective tax rate of negative 14, 5%.
Excluding the partial release of the valuation allowance on deferred tax assets and cares Act impact income tax expense for 2020 would have been $13 $6 million, which.
And at an effective tax rate of 25, 3%.
For 2019, we recognized income tax expense of $3 3 million, which is in effect the effective tax rate of 25, 4%.
Adjusted earnings was $41 1 million in 2021 compared to $65 9 million in 2020, reflecting lower adjusted operating income in 2021 as well as the partial release of the valuation allowance on deferred tax assets of $20 million in 2020.
Adjusted earnings increased by $25 $5 million from 2019.
Adjusted earnings per diluted share of $1 39 in 2021 compared to $2 25, and 2020 and 54 cents in 2019.
Turning now to the balance sheet inventory.
Inventory at the end of the fourth quarter was $254 million compared to $225 million at the end of September 2021, and $244 million at December 31, 2020.
Total inventory improved $10 million versus last year, as we continue to rebuild inventories to optimal levels.
Our balance sheet and liquidity remains strong as a reminder, we repaid the entire $101 million of outstanding debt during the second quarter of 2021.
As of December 31, 2021, we had $227 million of liquidity comprised of $85 million of cash and cash equivalents and $142 million of excess availability under the credit agreement.
Net cash provided by operating activities was $38 $7 million for 2021, primarily driven by net income of $41 $7 million somewhat offset by rebuilding inventory.
We continue to work toward rebuilding our inventory to optimal levels as we are able to do so we would expect that to have an unfavorable impact on working capital and cash provided by operating activity.
Turning now to 2022.
Our outlook for 2022 reflects the tale of two halves with the challenging first half turning to growth in the second half as we gain traction on our initiatives and the macro economic headwinds lessen we.
We expect to deliver positive net sales growth in comparable store sales growth for the full year.
First half headwinds include the impact of omicron on labor availability inventory constraints.
DIY consumer spending comparisons higher inflation and the anniversary of large stimulus refunds last year.
Our full year outlook assumes these headwinds will improve as we enter the second half of 2022.
While we are building inventory this quarter, we don't expect to return to optimal levels until the end of the second quarter provided there are no additional disruptions to the supply chain.
In addition, we expect to meet our hiring objectives in a continued tight labor market and we will continue to monitor the impact of inflation on consumer purchasing trends.
The first quarter has gotten off to a slow start.
Micron variance has impacted consumer behavior as well as store staffing levels in January we closed all stores nationwide for three Sundays and we experienced closures in various parts of the country for an additional 177 days.
While January was tough we are starting to see the impact of omicron moderate.
We expect our first quarter 2022 comparable store sales to improve slightly on a percentage basis compared to down six 7% in the fourth quarter of 2021.
We currently expect second quarter comparable store sales to improve on a percentage basis compared to the first quarter of 2022.
But we will continue to monitor the impact of inventory constraints and the anniversary of significant stimulus funding during the second quarter of last year.
Despite the slow start to 2022, we feel good about our full year outlook, we expect to deliver net revenue and comparable store sales growth for the full year as we replenish inventories are growth initiatives gain traction and macroeconomic headwinds lessen in the second half.
The biggest uncertainty in our 2022 planned pertains to gross margin. We are currently anticipating both transportation and material costs to increase in 2022, but we will not know the full magnitude until we finalize our carrier shipping contract.
In addition, our plan assumes we are able to continue to use pricing promotion and sourcing strategies to offset higher costs and there remains significant uncertainty around the impact of inflation on consumer spending and our ability to pass on sufficient pricing to cover increased costs.
Turning to SG&A 2022 will be a year of investment to drive long term growth.
We are focused on increasing investment behind our growth initiatives, including opening 20 to 25 new stores.
Expanding our pro sales team.
Investing more in our customer facing organization and investing in technology and digital enhancements to improve the customer experience.
We expect these investments to drive higher net sales over the next three years.
As a result of these investments we expect SG&A as a percent of sales to increase in 2022 compared to 2021.
We are planning for sequential improvement in operating profit from 2022 to 2023 and from 2023 to 2024 as we generate increasing returns on our investments.
Our entire organization is energized around achieving our target of $1 5 billion and net revenue coupled with expanded operating margin by 2024.
Our three year plan reflects strong profitability and cash flow by 2024.
From a capital allocation perspective, we anticipate investing 50 million to $70 million to rebuild inventory this year.
We also plan to invest in Capex in the range of $28 million to $32 million in 2022 to support our growth strategies, such as new store openings and complete our store rebranding as well as to increase operational efficiency.
As a result, we expect to report negative free cash flow in 2022 with excess cash generation expected in 2023 and 2024.
Our balance sheet and liquidity are strong and we have the financial flexibility to rebuild inventory invest in our organic growth strategies and return value to shareholders through our increased share repurchase program.
We are energized around our three year growth plan, which we expect to drive strong profitability and cash flow.
In summary, our teams remaining agile in meeting our customers' demand for flooring as we continue to navigate a challenging environment.
Despite the slow start to 2022, we feel good about our full year outlook as we expect the increased investment in our growth strategy to drive topline growth in the second half.
Thank you all for your time this morning with that I'll ask the moderator to open the call for questions.
Thank you.
Wonder if you'd like to ask a question today. Please press star followed by one on your telephone keypad now from Pet parents ask a question. Please ensure your hudson's fully kicked in in a muted likely Thats star one on your telephone keypad.
Our first question today comes from Suraj from home from Loop capital. Please go ahead. Your line is open.
Thank you for taking my question and thanks for laying out the three year plan.
My question is about how you get that.
Confidence I'm assuming that the.
The CAGR would be 9% topline over three year period, but it sounds like we're not going to get close to that in 2022.
From the qualitative outlook that you've given.
So that would seem to imply double digit growth in 2023, and 2024 is that true and if so how do you get.
The confidence with the limited macro visibility we all have that you can achieve this goal.
Thank you and it's a great question.
What Nancy did say is that in 2022, it is going to be a tale of two halves and we expect to see.
Improvement in the trajectory of sales growth in the second half of the year. What's really important is we've been working on our transformation strategy for the last 18 months and we can see through our initiatives of pro growth.
The investment we've made in new stores and the acceleration of the new stores that Nancy talked about.
Our digital first strategy and the Omnichannel growth and investments that we've been making.
Those returns really helping us drive and accelerate our market share as well as the work that our teams have done from merchandising standpoint on innovating new products. So we spent a lot of time, obviously building out a three year plan looking at our markets looking at our product portfolio looking at market share.
Penetration in pro and believe that we have a very strong value proposition being able to grow with three segments being able to grow and accelerate with pro being able to expand our services business and as we rebrand our company and broaden the reach the low flooring has over the old lumber liquidators.
<unk> will broaden the appeal and to DIY. So we have a good strong confidence that the numbers, we have laid out realistic and good objectives for us to be working towards thanks for the question.
Thank you.
The next question is from Seth Basham from Wedbush. Your line is open. Please go ahead.
Yes.
Thanks, a lot.
Morning couple of questions first on the quarter itself. When you think about the inventory situation.
Do you think that lack of inventory impacted comp this quarter relative to last quarter.
Yes. So good question Seth and good morning, we do believe the quality of our inventory position from Q3 to Q4.
Accelerated the impact of lost sales.
And particularly in vinyl categories, it took us longer to recover the which really impacts the take with customers the DIY customer.
Versus the recovery, we had in our solid wood program that being said as Nancy said, we see a significant inventory recovery.
Fully through Q2, and we've been really pleased.
With the actions that we've taken in Q4 to start to see the recovery of inventory flowing in Q1.
Got it is there any way to quantify the impact and the four corner I'll. Thank you Sir.
Yes, we haven't broken that out I mean, we have internally, but we're not sharing that externally, but it was it was a significant.
Element of.
Impact, particularly when we were recognized with our DIY business, which we're not happy with and we've got a lot of work underway to continue to broaden our brand appeal with DIY customers.
Got it okay, and recognizing youre going to see improvement here in the first quarter and into the second.
That should help drive improvement in comps.
What about on the labor side, how much do you.
Thank you experienced some lost sales because of labor shortages related to COVID-19 or otherwise in our fourth quarter and how you're thinking about for the first and second.
Yes, so I'll go to the first quarter is not as you said, we had pretty significant impact with.
The new bearing in January coming into the end of December as a lot of retailers reported.
Average and many of those stores was severely impact and that's why we made the decision to fully close for three days and again, we haven't broken out the exact impact.
Between stores that had to close on one offs, which was 179 days impacted in January the end of fourth quarter and January was tough that being said, we've seen a dramatic improvement in the impact from Covid from a labor staffing perspective, and we haven't had the kind of interruptions that we saw.
In January as we've moved through the quarter I will say on the other side from a staffing perspective, we've been pleased with the investments that we made.
Into frontline teams.
In the third quarter with wage adjustments and.
In our supply chain, we've seen some of the best hiring over the last 90 90 days as we prepare for the acceleration of our spring selling season. So I think that there is there's clearly was a COVID-19 impact but people were struggling through Q3, beginning of Q4, just on where our labor with Suning.
Our teams in the field have really done a good job of attracting talent and filling in slots to make sure that even with co we're getting better hiring coverage in our stores.
Got it. Thank you and then as it relates to the price increases that you are taking pretty broadly what kind of resistance or are you seeing from customers are you seeing signs of trade down there and how do you check that to impact unit sales in 2022.
It's interesting I was looking at it yesterday and talking to folks in the field, we have not seen a slowdown.
Better and best categories.
We introduced or Ivana.
Premium product and teams in the field have just done an outstanding job of positioning that product with customers. So I actually think that as people are doing more remodeling our pros.
The pipelines that are full over six months.
Customers, even though there's been an overall inflation when you really look at it on a square foot cost per square foot and that's what our customers look out right.
We're not getting pushback on the premium end of our business on the mid tier of our business for sure I think this broader concern of the mass impact of inflation and what the whole customers, while it looks like but certainly when you talk to approach their pipeline is full out many of them out through <unk>.
June and July and so we feel really confident in that element of yes, we've got inflation flowing through but as it relates to discretionary spending today people are continuing to to do the remodels and I think a lot of it is where companies are allowing people to work from home on a hybrid basis.
It looks like on a go forward basis people are looking at how are they going to use their homes.
Thats still continues to be aging housing stock that's going to accelerate.
Upgrades on Remodels, So we've got great confidence both in the industry hard surface flooring.
Flowing through into the flooring business.
Thank you and then lastly on the margin outlook to be anymore specific Nancy is how much impact do you think you will see an SG&A margins from your investments and how we should think about operating margins overall year over year and 22 versus 21.
Hey, Jeff so.
2022, we keep talking about the biggest uncertainty for us is what's going to happen with gross margin in both the transportation and material costs, we've seen significant pressure on that and we're in the process of finishing those shipping contracts finalizing those now so our plan assumes that we're going to continue to use the pricing and promo and sourcing strategy.
That we've used so successfully to offset these higher costs and we've got to keep an eye on just what you talked about the inflation on the consumer and how that affects their spending having said that we've clearly said 2022 is going to be investment year between capex and opex and the investments that we made last year that Charles referenced on the labor. So we're definitely going to see an impact.
On SG&A for 2022.
And we're expecting that that investment long term is going to generate the sales growth that we've talked about in 'twenty three 'twenty four and we would expect that to moderate as we increase the sales in the out years.
Understood kind of trying to quantify the SG&A impact or how to think about.
Where are your best guess of where operating margins will land in 'twenty two based on your other assumptions.
We have not shared that specifically because of the uncertainty still related to the first half of the year, but I think based on the things that we're investing in this year in terms of the new store openings, we certainly quantified that it's $20 to 25 new stores.
The work that we continue to do to expand our pro sales teams.
The customer facing org changes that we've made as well as continuing to invest in technology and digital enhancements.
We are going to run higher from an SG&A perspective than you saw in 2021.
742.
Thank you very much.
Seth I will just point you to our comments in terms of what we expect out of a three year growth plan at a $1 five we expand we expect that to be accomplished with expanded margins.
So again as we as we come out and meet with folks.
Obviously go through our plan in more detail, but we're excited about where we believe we can take our expanded margins over three years.
Thanks, Okay. Thank you very much and good luck.
A final reminder, if you'd like to ask a question Thats star one on your telephone keypad.
As we have no further questions I'll hand back to the management team for any closing remarks.
Thank you operator, thanks, everyone for joining us today I want to reiterate our excitement around a three year accelerated growth plan wishing everyone. Good health and safety and we look forward to updating you on our performance next quarter. Thank you.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
Okay.
Okay.
Sure.