Earnings Transcript for LL - Q1 Fiscal Year 2023

Operator: Good morning. Thank you for attending today’s LL Flooring Holdings First Quarter 2023 Earnings Conference Call. My name is Megan, and I’ll be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to Bruce Williams from ICR. Bruce, please go ahead.

Bruce Williams: 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 Terry Blanchard, Interim 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 LL Flooring. Although LL Flooring 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 LL Flooring’s 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. 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 LL Flooring undertakes no obligation to update any information discussed in this call. Now, I am pleased to introduce President and CEO, Charles Tyson. Charles?

Charles Tyson: Thank you, Bruce. Good morning, 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. Terry Blanchard, our 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 the 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. As a reminder, these areas are

Terry Blanchard: 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. I will be discussing certain non-GAAP adjusted numbers today, which eliminate certain items that are not indicative of our core business results. For both 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. Gross profit for the first quarter of 2023 included 2.1 million of incremental costs related to custom delays and certain vinyl flooring products from Asia that Charles detailed earlier. Gross profit for the first quarter of 2022 was also impacted by the net of antidumping and countervailing duty rate charges. Excluding these 2023 and 2022 charges, adjusted gross margin and non-GAAP measure of 37.4% increase 20 basis points, compared to the same period last year. The increase in adjusted gross margin, primarily reflects company's ability to offset higher material and transportation cost 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 2022. Adjusted SG&A, a non-GAAP measure was approximately $100.9 million or 41.9% of net sales, a 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 of 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 $0.37, compared to earnings per share of $0.14. Adjusted loss per share on non-GAAP measure was $0.36, compared to an adjusted earnings per share of $0.13 in the prior-year period. Turning to our quarter-end balance sheet and cash flow. Inventory declined approximately 7.4% 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 that is 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 will continue 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 Duravana brand, which carries higher margins. SG&A dollar spend and 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 in our customer relationship management platform, which we expect will support higher sales levels and make our operating structure more efficient over time. In-light of the challenging environment, we are 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 will keep you updated on future calls. In terms of capital expenditures, we expect our 2023 spend to be in the $15 million to $20 million range, primarily to support our third distribution center, productivity investments, maintenance CapEx, and store openings. As a reminder, we prudently moderated our start 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, we are very proud of our team and how they continue to navigate through the difficult environment. We remain confident in the long-term fundamentals of our business as we focused on executing against our strategic initiatives and delivering long-term sustainable growth. With that, I will turn the call over to the operator to start the Q&A session.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Laura Champine with Loop Capital. Your line is now open.

Laura Champine: 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?

Charles Tyson: Yes. Good morning, Laura. Thanks for the question. We're still waiting for that final data to come out, but for sure we saw sequential decline from Q4 to Q1. So, we continue to focus on our longer-term initiatives around Pro and specifically building our 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.

Laura Champine: And you mentioned in the press release that Pro turned negative. Is it your view on the industry that Pro turned negative overall or do you think that that's an LL specific issue?

Charles Tyson: I think we're seeing as we talk to our pros. Certainly, if you look a year ago, many Pros had a large book of business and were backlogged and certainly we're not hearing the level of backlog. Many customers are coming in with multiple Pro quotes. So, I think that you're seeing a normalization. We also saw as we saw square footage change sequentially, we're seeing lower square footage per project both in the Pro segment, as well as the consumer segment. So, our expectation is that while customers are being impacted by inflation and interest, there's a moderation on Pro projects, particularly in areas like house flipping where there's just no availability in that segment and that's a pretty meaningful segment for Pro. There are other segments of Pro business, small build or remodel that continue to be active. So, we're seeing different impacts across segments in Pro, but certainly whether you look geographically as we talked in the West. We saw more slowing there than we did in the East and South, particularly Florida that's benefiting from hurricane.

Laura Champine: Got it. Thank you.

Charles Tyson: Thanks, Laura.

Operator: Thank you. There are currently no questions registered. So, I'll now pass the conference back over to Charles Tyson for closing remarks.

Charles Tyson: Thank you, operator. Thanks everyone for joining us today. Before closing, I'd like to recognize the hard work and resilience of the whole team at LL Flooring. Our merchants, our supply chain teams, and our teams in the field who are all navigating a challenging macro environment and are dedicated to our customers and the long-term success of our business. I'm wishing everybody good health and safety and we look forward to updating you on our performance next quarter. Thank you.

Operator: That concludes the LL Flooring Holdings first quarter 2023 earnings conference call. Thank you for your participation. I hope you have a wonderful rest of your day.