LL Flooring Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Lumber Liquidator's third quarter 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 Danielle O'Brien. Please go ahead.

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 US 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 believe that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations for 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 Liquidator's six filings with the SEC. 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 Liquid Clears undertakes no obligation to update any information discussed in this call. Now, I'm pleased to introduce President and CEO, Charles Tyson. Charles?

Charles Tyson Thank you, Danielle. I'd like to begin by acknowledging our team for their continued dedication and focus that enabled us to deliver a very strong quarter. Our transformation is well underway, and our associates demonstrated strong operational execution of our plan by remaining agile and customer-focused through the quarter. Our entire team, from our sales associates to our DCs and support centers, have shown great commitment, flexibility, and perseverance throughout this entire year to deliver both outstanding results and terrific customer service to our flooring customers. I'm very proud to be leading such a dedicated team who are working every day to execute our transformation strategy and are committed to delivering a high-touch consultative experience for our hard surface flooring customers. Turning to our positive results for the quarter. We continue to make strides with our transformation plan, and we saw evidence of progress on multiple fronts. As comp sales increased by 10.9%, the gross margin expanded 320 basis points over Q3. Adjusted SG&A was $4.5 million lower than last year, and we delivered $28.7 million in adjusted operating income for the quarter, a significant $25.3 million improvement in adjusted operating income versus last year. As we continue to navigate the COVID-19 environment, we remain focused on monitoring all factors influencing customer demand, including existing home sales and mortgage rates and consumer confidence. During the quarter, we continued to execute 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. Our recently formed culture committee is working to define our promise and mission, as well as build out our company values. Developing the new LL culture is critical to how we will execute our strategy and service our customers. We're working to ensure that we have the right leaders in the right roles to effectively achieve our company's goals. We continue to narrow spans of control in our field organizations by hiring more leaders at the regional level to bring greater concentration to executing a high-touch service model for both our DIY and pro customers. Our field leadership has also focused on developing a more robust store and regional manager training program that promotes both diverse and inclusive leadership, as well as drives greater internal career advancement, building our bench for future store leadership. We've enhanced our merchandising organization with new divisional merchandising positions, adding talent accountable for driving both trend right assortment and category portfolio management to grow sales and profits. Turning to our second strategic pillar of driving traffic and transactions in stores and online. We remain focused on enhancing our digital engagement with customers and continue to allocate our marketing dollars where we believe they are most effective, specifically increasing investment in social and search. We were pleased to see that this work to increase allocation into digital marketing generated positive results by driving new customers to our brand despite our total marketing spend decreasing year over year. On our product portfolio, our goal is to consistently deliver a trend-right assortment of wood and manufactured products. We're extremely pleased with the results that have been driven through the repositioning of our solid wood business to a more trend-right quality assortment with a focus on improved finishes and decors. This effort is centered around the expansion of our Belleau Wood Artesian product portfolio. Along with the continued strength and expansion of our vinyl offerings, these changes were a driver of our comp lift in the quarter. Our field teams are focused on selling a complete solution to our customers, ensuring we meet their end-to-end needs. In the quarter, we emphasized attachment selling, training our associates to sell all the necessary high margin attachments, including moldings and accessories, to complement any flooring purchase. We want our customers to view us as a one-stop shop for their entire flooring journey, and we're pleased by the acceleration in sales we saw in our accessory categories in the quarter. As it relates to transactions, our install and pro customers both improved significantly from Q2 to Q3. While our completed installs were slightly negative for the quarter, there was considerable improvement from Q2 to Q3, and we were pleased to see new installation assessments turning positive in the quarter. This was driven by customers' increasing willingness to allow contractors into their homes for home improvement and installation projects. In pro, we also saw sequential growth from Q2 to Q3, moving into positive territory. We saw changes in segment mix with greater strength from remodelers and installers and weakness in residential property management that we attribute to the impact of COVID-19. Our third pillar is improving the customer experience. We remain committed to creating a uniquely consultative shopping experience across all our platforms, and our goal is to meet our customers at any stage of their flooring project. A significant portion of our customers are changing their preferences and shopping online for their flooring needs, and our organization is quickly adapting. We leveraged our investments in digital to improve our online experience, with unique tools like Picture-It and Floor Finder gaining further traction. Web sales grew approximately 140% over Q3 last year, as our investments in digital drove our results. We began piloting remote video selling with live associates to make it easy for customers who want to shop from their home to do so. We're pleased by the initial results, and we anticipate expanding this capability over the coming quarters. And fourth, improving profitability. Our merchant teams drove our business in the quarter by making changes to our promotional strategy that offer customers new, exciting promotion and yield an improved margin benefit. The work our sourcing and merchant teams have done over the last 18 months continues to deliver margin benefit as we drive our alternative country sourcing strategy. We remained extremely disciplined in managing our expenses to improve our bottom line. Similar to last quarter, we optimized our marketing efforts and pivoted towards more efficient channels like digital. We remain focused on executing our transformation plan and making progress against our strategic pillars to positioning us for long-term success. Now let me update you on our initiatives against each of our four pillars. First, let's start with our people and culture. As I spoke about last quarter, we introduced a fourth pillar to our previous strategic framework focused on people and culture. There will be a key component of our strategy as a specialty retailer providing a high-touch service model with knowledgeable associates supplying flooring expertise. A cornerstone to our people's agenda is our commitment to creating a diverse and inclusive workplace that values and leverages individual differences to accelerate the company's growth. I'm especially proud of our Diversity Inclusion Task Force that includes team members from across our organization. They are developing a set of initiatives, including building and supporting programs aimed at attracting, developing, and retaining diverse talent and promoting an inclusive workplace across our organization. Additionally, each quarter, we continue to make investments in training to deliver a differentiated service experience for both our pro and DIY customers and to give our teams greater confidence in building lasting relationships, particularly with our pro customers. Finally, I'm also excited to introduce Alice Givens as our new general counsel and member of our senior leadership team. Alice's strong retail background and public company experience is a perfect complement to our organization, and she brings over 20 years of compliance, legal, and retail experience. Turning to our objective of driving traffic and transactions, we believe revitalizing our brand will be a significant driver of this pillar. We are moving forward with our pilot of approximately 20-plus stores that have rebranded to LL Flooring in Q4. We are utilizing this pilot as an opportunity to learn and understand customer response to our updated branding. As previously stated, we do not expect any material capital or operating expenses related to the rebranding of these stores in 2020. A strategy to drive growth with the pro customers is a critical component of our transformation. Our field teams are focused on expanding trial, scale, and retention of our best pros. And as I just mentioned, we're delivering consistent training to our associates around pro business development. Additionally, we have created enhanced reporting to allow for a more effective understanding of pro behaviors at the local store level. We are continuing to build out our pro value proposition and look forward to discussing this more fully as we roll out new programs in the first half of 2021. Investments in our digital install platform are enhancing the customer experience and driving install efficiency. We see installation as a core element of our value proposition. We expect these new capabilities across our install experience, as well as testing remote in-home selling, will drive expanded adoption of our installation services. Moving to improving the customer experience, our digital capabilities are reinventing the way we do business, enabling us to interact with customers at a greater number of touch points and ensuring we can do business effectively in a world of social distancing. Whatever a customer's preferences are and how they wish to engage with our brand, we strive for a high touch approach, unparalleled expertise, and a trend right assortment with competitive pricing both in stores and online. Our end-to-end digital experience is essential to executing our transformation. Our teams are laser focused on ensuring a differentiated experience for all our customers. Let me give you one example. Dylan Bendian, a seasoned LL flooring store manager in New Jersey. His customer came into the store to schedule an in-home assessment. And after the assessment was completed, the customer came back to the store multiple times to make revisions to his work order. A team worked diligently to ensure the flooring and installation setup were exactly meeting the customer's needs. The customer himself, a skilled craftsman, was so delighted with the floor and insulation, he posted a five-star review and quoted, the team treated my house like it was their own, and I will be using them to complete the rest of my house. He returned to the store to buy floor care products and show the team pictures of his new home project. This great service story shows how our teams work alongside our customers over multiple weeks to ensure they have a great experience. Great work, Dylan and team. Thank you very much. Know that this is just one of many stories highlighting the fantastic work our teams are doing. Finally, we continue to work on improving profitability, focusing on best country sourcing to mitigate tariffs, driving gross margins, and reducing operating expenses. As we communicated in August of 2020, the Section 301 tariffs on certain vinyl products from China were again reinstated at 25%. We have several approaches to mitigate the impact of the tariffs, including partnering with current vendors to lower costs, alternative country sourcing, and price adjustments. Nancy will provide more information regarding the reinstated tariffs in her remarks. As a reminder, we saw a benefit of $11 million of operating income in the fourth quarter of 2019 as a result of the retroactive exclusion of certain tariffs, which will not be repeated in 2020. Leveraging best country sourcing for our entire suite of products across all of our operations is key to this mitigation strategy. We've significantly reduced the amount of goods we purchased from China from approximately 46% for the full year 2019, with the goal of having a run rate of Chinese purchases to the mid-30s as of the end of 2020. And those efforts will continue in the coming year. Looking to the future, we endeavored to partner with the best vendors to obtain premier quality products, regardless of location, and we're always evaluating alternatives for best country sourcing. Last quarter, we also communicated that we were conducting a comprehensive review of our real estate portfolio. Following the conclusion of this review, we made the decision to close our Canadian operations, including all eight stores in Canada, and six underperforming U.S. locations by the end of 2020. We will continue to monitor store performance on an ongoing basis. We opened one store in the third quarter, and as noted last quarter, our current plans including opening two to three new stores in Q4. This will enable us to expand our reach to serve new pros, DIY customers, and buy online, pick up in store digital customers in key geographies. I'm excited by the work ahead and pleased that our company's transformation is on track. Our teams remain agile and focused, and our strategy is beginning to bear fruit as we evolve into a high-touch specialty hard surface flooring retailer. Before I hand the call over to Nancy, I once again want to thank our associates for their tireless efforts. We could not have this level of success without their hard work and dedication. It's through teamwork and collaboration, both internally and externally, with vendors, landlords, and suppliers, that we were able to deliver strong financial performance and an exceptional experience for our customers. I will now turn the call to Nancy to share the financial details of the quarter. Nancy?