Q1 2023 LL Flooring Holdings Inc. Earnings Call
Excuse me, ladies and gentlemen, thank you for your patience the call will begin momentarily again. Thank you for your patience to call will begin momentarily.
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Good morning. Thank you for attending today's Oh, Oh flooring Holdings first quarter 2023 earnings Conference call. My name is Megan and I'll be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
I'd like to ask a question. Please press star one on your telephone keypad.
I'd now like to pass the conference over to Bruce Williams from ICR. Bruce. Please go ahead. 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.
Terry Blanchard.
From Chief Financial Officer, as we begin let me reference the safe Harbor provisions of the U S Securities laws before it looking statements.
Conference call May contain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of <unk> flooring.
Although L O, Florida 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 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.
Formation contained in this call is accurate only as of the date discussed investors should not assume that the statements will remain operative Africa today L. O flooring undertakes no obligation to update any information discussed in this call.
Now I am pleased to introduce the president and CEO Charles Chao.
Thank you Bruce.
Everyone and thank you for joining us today.
During today's call I will begin by reviewing our first quarter results and then discussing progress on our key operational strategies, including plans to improve sales productivity and profitability, which gives us confidence in achieving long term sustainable growth.
Gary Blanchard interim CFO will then review our financial results in more detail and discuss our outlook before we open up the call to your questions.
Now turning to our first quarter results.
As expected our first quarter performance was very challenging and our performance reflected the impact of difficult macro backdrop had on discretionary home improvement spending.
In addition, we continue to experience pressure from brand awareness and operational challenges that impacted the first quarter results.
Despite the near term volatility we remain focused on areas of improvement that will help stabilize our results and drive long term growth opportunities.
Yeah.
As a reminder, these.
These areas are one further broadening of growing our brand awareness among consumers to drive traffic.
And to ensuring a consistent customer experience across our omnichannel network to improve conversion.
Three.
Improving operating efficiencies by actively working to reduce costs, while focusing investments on our top growth priorities.
Importantly, we continued to execute on these areas during the quarter, which I'll discuss shortly.
For the quarter total comp store sales were down 15, 4% driven by lower spending by consumers versus last year combined with a decline in pro sales.
As mentioned earlier, we believe the lower consumer sales reflected continued pressures from inflation and high interest rates on discretionary spending coupled with brand awareness and operational challenges.
Notably we saw the most significant pullback from the consumer starting in early March.
Drilling down on the first quarter sales drivers, we saw a four 2% increase in average ticket and an eight 7% increase in the average retail price per merchandise units sold compared for the first quarter of 2022.
The higher average retail price was driven by inflationary pricing.
Conversely, we saw a 19, 6% decrease in transactions compared to the first quarter of 2022.
Primarily due to lower consumer demand.
Nope, we experienced our largest transaction declines from the west region, whereas the large concentration of stores, while Florida continues to outperform driven by strong market dynamics.
In regard to our pro sales performance during the quarter, we experienced less demand for larger ticket consumer projects as we believe the consumer postponed or canceled planned projects.
Nevertheless, we remain very confident in our pro long term strategy and our investment in the pro business.
Despite the sales challenges during the quarter adjusted gross margins improved slightly to 37, 4%.
On a GAAP basis, we reported an operating loss of $13 2 million or negative five 5% on an adjusted basis, We reported an operating loss of $10 8 million or negative four 5%, reflecting lower sales and the SG&A investments we have.
Making to support our long term growth.
We ended the quarter with a strong balance sheet and total liquidity of $157 million.
Importantly, we ended Q1 with $47 million of debt, which was down from $72 million at the end of Q4.
Terry will discuss the details of our first quarter financial results in a moment.
Despite the external headwinds that we're facing we remain confident in our ability to deliver the high touch service of an independent flooring retailer combined with the value assortment and convenience of a national brand to that end, we continue to execute on our strategic initiatives as we forward.
Based on improving sales productivity and profitability as well as delivering long term sustainable growth.
These initiatives.
Growing sales to pro customers.
Building brand awareness, improving the customer experience.
Innovating new products.
First growing sales to pro customers.
Our pro sales strategy remains a core growth pillar for L. L.
While we experienced a slight decline in the pro category in Q1, we had previously generated eight consecutive quarters of growth.
We continue to build momentum with our national account strategy, which is being driven through execution by our inside and outside sales teams.
As we look ahead, we will continue to invest in our growth strategy to further develop capabilities aimed at driving increased retention.
With existing pros.
We believe that implementing a new customer relationship management.
Our EM platform will be integral in helping to achieve these goals.
Our CRM system, not only ensures a single repository of key customer information. So we know how best to meet their needs some ones, but it also enables key triggers for future contact points during their shopping experience.
We have made it a priority that our entire store team focuses on understanding each customer's unique story.
Project objectives, whether we're chatting with customers online engaging with pros in a store or texting them about a material pick up the CRM tool will help ensure we consistently execute more targeted messages for every customer.
We plan to have completed our rollout for pro customers by early third quarter.
Schumer customers by the fourth quarter.
We expect to begin to realize early benefits from the implementation in the second half of 2023, and we're confident that this combined with more targeted marketing will drive efficient customer acquisition and improved conversion.
Second building brand awareness, we continue to focus on building brand awareness is a key area of opportunity to drive traffic and increase conversion to improve our sales performance over the long term.
Since our rebranding from lumber liquidators, we have broadened our appeal as a national flooring destination offering a one stop shop for consumers who are seeking.
Seeking service and expertise from inspiration to installation.
Our market research continues to tell us that the new L O flooring brand scores significantly higher both as lumber liquidators.
On key metrics, such as product quality assortment and store associate expertise, which gives us confidence that we are gaining traction.
We said before our unaided brand awareness remains low however, and.
As a result, we're intensely focused on broadening brand awareness by investing in top of the funnel marketing strategies that evolve our creative approach to increase relevancy.
<unk> media campaigns to increase efficiency and expand our reach to increase exposure.
Expanding on these three strategies.
First creative.
We're on track to launch our new campaign in the coming months that communicates the yellow flooring value proposition highlighting the selection expertise assortment and value.
Second efficiency as mentioned, we're in the process of implementing a new CRM platform that will help improve the effectiveness of our digital marketing spend and strategy to increase conversion, while lowering customer acquisition costs.
Third reach we're expanding our network presence across linear and digital media.
Third improving the omni channel customer experience.
We offer our customers a differentiated omnichannel experience that allows them to shop and purchase wherever and however, they like.
Many customers start their flooring journey online.
And our online tools allow customers to easily navigate to that preferred flooring solution.
Make flooring selections and place an order.
We added additional capabilities to our home delivery services in Q1.
Utilize our 440 stores and supply chain network.
Our customers have always been able to see inventory and pick up that product any store they choose but now we're allowing our online customers to have white glove or curbside delivery from the store to their home.
This allows the customer to be able to do a same day or same week project. When time is critical and not waiting for a delivery from a distribution center.
In store, we provide a one stop shop for customers, including an unmatched breadth of product offerings knowledgeable associates and installation services, but we managed through our network of independent third party contractors.
In addition.
Online call Center serves as an additional resource for our customers as they embark on their shopping experience.
It is important to our customers that we create a seamless experience across omnichannel platform and continue to improve the shopping experience by investing in our people and in technology.
This complete omnichannel experience widens, our competitive advantage over independents.
For innovating new products, we're consistently focused on creating products that our customers will find both aesthetically pleasing as well as functional at a great value.
And a 100% PVC free door about our brand is doing very well received by our customers.
Our fastest growing brand in soles.
Consumers everyday living needs at a great value customer.
Customers Love the features of hard surface flooring infused with proprietary waterproof technology and we intend to continue investing in expanding the assortment of door about through this year.
We believe that our growing assortment of proprietary brands will continue to differentiate us from our competitors.
Lastly, I wanted to talk about a new category pilot.
As we have rebranded to L. O flooring, we receive feedback from our customers and our pro customers that they expected us to provide comprehensive flooring solutions for their projects, including carpeting.
As a result of that feedback we've launched a pilot, adding carpet and four stores we.
We intend to extend that pilot to 20 additional stores by the end of second quarter.
As a result of adding carpet our current addressable market grows to 36 billion driven by the addition of carpet of $13 billion.
Again, this category expansion aligns with that brand repositioning to Ll flooring, which implies a broad selection of hard flooring carpet and installation services for our customers.
While still very early initial engagement has been positive from associates consumers and our pro customers.
Importantly, our entry into carpet does not require any investment in our supply chain.
Or in inventory as the product is direct shipped from the manufacturer to the installer.
We will continue to keep you updated on the status of this pilot next quarter.
Before turning to our outlook I am pleased to announce that we are opening a third distribution center in Dallas in Q3.
Which will further optimize our supply chain network.
Opening a third DC will further improve our service levels and support our strategic growth priorities. It will also reduce transportation costs and optimize our supply chain efficiency over the long term.
Now I'd like to take a few minutes to discuss our outlook for 2023.
First I would like to update you on the vinyl flooring related customer delays originating from Vietnam.
As we've previously discussed in February of 2023. The company began to received attention notices from U S. Customs related to flooring products that contain PVC as a consequence of the weaker forced labor Prevention Act U F. L T a.
<unk> of the U S. LTA is having broad implications across flooring products solar panels cotton and other industries due to the customs delays.
During Q1, we experienced continued delays, which resulted in $2 4 million of incremental expenses and approximately $3 million of lost sales.
U S customers is continuing to detain shipments within the vinyl product category and we are diligently working to provide additional documentation that they are requesting.
We do not have any visibility as to when these delays will be resolved.
<unk> product will be released.
We're continuing to work to mitigate the disruptions by featuring alternative products in our current assortment and leveraging our sourcing capabilities to look at alternative flooring categories and sourcing geographies.
Despite our mitigation efforts, we believe that this issue could have further material impacts on sales and margins as we progress throughout the year.
Next we expect the macro backdrop to remain challenging as elevated inflation and higher interest rates drive a more cautious consumer.
<unk> are higher ticket discretionary purchases.
In the near term this make sales visibility more limited. However, we are focused on driving sales because the initiatives just discussed.
In terms of margins, we continue to expect that merchandise margins will improve as we realize the benefits from freight cost relief to gross margin beginning in the second half of 2023.
On the expense side, we recognize that cost structure is not aligned with our current run rate of sales.
To that end, we have engaged consultants to undergo a comprehensive strategic review of our cost structure and we will provide an update on future calls.
In terms of liquidity the strength of our balance sheet positions us to navigate the challenging macro environment.
In Q1, we reduced our bank borrowings by $25 million and have availability under our bank credit agreement of $150 million, which we believe to be adequate.
Importantly, looking beyond 2023, the medium to long term outlook for repair and remodel spending remains strong supported by tailwind such as the aging housing stock in the U S. New household formation by millennials.
And the desire of baby boomers to age in place.
With that as a backdrop, we remain confident in the long term fundamentals of our business.
We're continuing to work on each of our strategic priorities and we remain focused on delivering long term sustainable growth as a leading specialty flooring retailer.
With that I will turn the call over to Terry to review, our first quarter results and outlook in more detail.
Terry.
Thanks, Charles and good morning, everyone.
Today I'll focus on the key highlights of our first quarter results and then I will discuss how we are approaching the remainder of the year.
Be discussing certain non-GAAP adjusted numbers today, which eliminate certain items that are not indicative of our core business results for full details regarding our financial results. Please refer to our earnings press release on the Investor Relations section of our website.
Turning to our results.
For the first quarter net sales decreased 13, 7% versus the prior year period, driven primarily by a decline in sales to consumers and to a lesser extent declines in our pro segment.
Comparable sales decreased 15, 4% year over year.
During the quarter, we opened one new store late in the quarter, bringing our store count total to 443.
Gross profit of $88 million decreased $16 1 million compared to the first quarter of 2022 and gross margin of 36, 6% decreased 70 basis points compared to the same period last year.
<unk> profit for the first quarter of 2023 included $2 1 million of incremental costs related to customer delays and certain vinyl flooring products from Asia.
Detailed earlier.
Gross profit for the first quarter of 2022 was also impacted by the net of anti dumping and countervailing duty rate charges.
Excluding these 2023 and 2022 charges adjusted gross margin a non-GAAP measure of 37, 4% increased 20 basis points compared to the same period last year.
The increase in adjusted gross margin, primarily reflects the companys ability to offset higher material and transportation costs through pricing promotion and alternative country vendor sourcing strategies.
As Charles mentioned, we expect to see continued merchandise margin improvement as we anticipate realizing the benefits from freight cost relief with the more significant benefits to gross margin beginning in the second half of 2023.
SG&A expenses of $101 2 million increased $2 2 million compared to the first quarter of 2020 to adjust.
Adjusted SG&A, a non-GAAP measure was approximately $109 million or 41, 9% of net sales of 640 basis point increase versus the prior year due primarily to expense deleverage from lower sales volumes.
In addition, operating expenses were higher due to investments, we are making to generate long term sales growth as well as increased store labor cost due to competitive wage rate environment as we focus on retaining talent.
Q1, operating expenses were partially offset by restructuring cost savings and lower variable costs due to lower sales.
As a result.
First quarter operating loss was $13 2 million compared to operating income of $5 1 million in the prior year.
Adjusted operating loss, a non-GAAP measure was $10 8 million compared to an adjusted operating income of $4 8 million last year.
And first quarter net loss per share was 37% compared to earnings per share our 14th.
Adjusted loss per share a non-GAAP measure was 36% compared to an adjusted earnings per share of <unk> 13 in the prior year period.
Turning to our quarter end balance sheet and cash flow.
Inventory declined approximately seven 4% from December 31, 2022, driven by sell through of higher cost inventory and reflects our continued focus on managing working capital.
We ended the quarter with $157 million in liquidity comprised of $7 million in cash and $150 million of availability under our revolving credit facility.
Our net cash flow provided from operating activity in the first quarter was $26 1 million driven by lower inventory levels. We are pleased to have strengthened our balance sheet during the quarter and ended Q1 with $47 million of debt, which was down from $72 million as of the end of 2022.
Capex was $4 7 million for the quarter, which primarily reflects the investments in our Dallas distribution Center.
Scheduled to open in the third quarter.
Now, let me turn my comments to the outlook for the remainder of 2023.
Given the current inflationary trends as well as a challenging macro backdrop and the customs hold on certain vinyl products. We expect sales visibility to remain limited for the balance of the year. Despite these factors.
We remain focused on executing against our strategic initiatives and believe our strategy to increase brand awareness and deliver a more consistent customer experience will gain traction and drive store productivity.
Gross margins are expected to improve year over year with a stronger second half driven primarily by a reduction in international shipping rates and sourcing costs.
We're continuing to monitor the competitive pricing environment to form our pricing and promotion strategies. In addition, we expect the gross margin rate to benefit from a greater mix of our premium direct lineup brand, which carries higher margins.
SG&A dollar spend in SG&A spend as a percentage of sales are expected to increase year over year, primarily due to inflationary pressures on wages and benefits investment in our new distribution center and our customer relationship management platform, which we expect will support higher sales levels and make our operating <unk>.
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In light of the challenging environment, we are prudent prudently managing expenses and are looking for ways to align our cost structure with our current rate of sales to preserve profitability.
To that end as Charles mentioned, we have engaged consultants to undergo a comprehensive strategic review of our cost structure and we'll keep you updated on future calls.
In terms of capital expenditures, we expect that 2023 spend to be in the $15 million to $20 million range, primarily to support our third distribution center productivity investments maintenance Capex in store openings. As a reminder, we prudently moderated our store opening plans to only three stores for this year.
So in summary, the macro environment continues to be challenging and we expect these headwinds will continue throughout the year. However.
However, we are very proud of our team.
How they continue to navigate through the difficult environment.
We remain confident in the long term fundamentals of our business as we focus on executing against our strategic initiatives and delivering long term sustainable growth.
With that I'll turn the call over to the operator to start the Q&A session.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.
As a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question. We will pause briefly ask questions are registered.
Our first question comes from the line of Laura Champine with loop capital. Your line is now open.
Good morning, and thanks for taking my question.
The press release seem to indicate that.
There's a belief that you guys lost share in the core.
What do you think the industry growth rate or decline rate was in Q1.
Yes, good morning, Laura Thanks for the question, we're still waiting for the final data to come out but for sure. We saw sequential decline from Q4 <unk>.
Q1.
So we continue to focus on our longer term initiatives around pro and specifically building brand awareness as I said in the quote we're not happy with our current performance, but we've identified.
Key areas that our teams are driving to help us build long term growth through both product portfolio our pro business.
And improving our overall customer experience.
You mentioned in the press release, it pro turn negative.
Your view on the industry. The pro turned negative overall or do you think that that's an L. L specific issue.
I think what we're seeing.
As we talk to our approach.
If you look a year ago, many pros had a large book of business.
And what backlog and certainly we're not hearing the level of backlog many customers are coming in with multiple pro quotes so I think that youre seeing a normalization.
We also saw as we saw a square footage change.
Sequentially, we are seeing lowest square footage.
<unk> both in the pro segment as well as the consumer segment. So our expectation is that.
Customers are being impacted by inflation and interest.
Theres a moderation on the pro projects, particularly in areas like house, flipping, where theres just no availability.
In that segment and that's a pretty meaningful segment for pro.
Other segments of pro business small small build or remodel.
Continue to be active so we're seeing different impacts across segments and pro but certainly whether you look geographically as we talked in the west we saw more slowing than we did in the east and South, particularly Florida, that's benefiting from Hurricanes.
Got it thank you.
Thanks, Laura.
Thank you.
There are currently no questions registered so I'll now pass the conference back over to Charles Tyson for closing remarks.
Thank you operator, and thanks, everyone for joining us today before closing I'd like to recognize the hard work and resilience of the whole team at <unk> flooring.
Our merchants.
Our supply chain teams and our teams in the field, we're all navigating a challenging macro environment and are dedicated to our customers and the long term success of our business.
And wishing everybody good health and safety and we look forward to updating you on our performance next quarter. Thank you.
Okay.
That concludes our <unk>.
<unk> Holdings first quarter 2023 earnings conference call. Thank you for your participation I Hope you have a wonderful rest of your day.
Yeah.
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