LL Flooring Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Lumber Liquidator's first quarter 2021 earnings conference call. As a reminder, this conference is being recorded and may not be reproduced in full or in part without permission from the company. I would now like to turn the conference over to Julie McMaden. 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. and Nancy Walsh, our Chief Financial Officer. As we begin, let me reference the safe harbor provisions of the U.S. securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of LL Flooring. Although LL Flooring believes that the expectations reflected and 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 Florence's filings with the FTC. 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. 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 Foreign 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. Good morning, everyone. On today's call, I will review our first quarter highlights and our progress towards realizing our vision to be the customer's first choice in hard surface flooring by providing the best experience from start to finish. First, I want to thank all of our associates for driving our growth and profitability strategies forward and providing a superior experience to our customers during the quarter. Turning to our positive results in the quarter, we delivered a 6.9% increase in comp sales, which was driven by continued execution on our transformation initiatives, strong demand from home improvement projects, and accelerating year-over-year growth in our installation business, as well as the impact from the onset of COVID-19 shutdowns in March of 2020. During the first quarter, a big winter sale event directly overlapped severe winter weather in February and compared unfavorably to a successful winter sale event in the first quarter of 2020. In addition, last year, we had one more day in the first quarter for leap year, during which we also benefited from a successful sales event. We feel good about the underlying demand in our business and the traction we are seeing in our initiatives, which we believe is not fully reflected in our first quarter comparable sales. Our teams delivered outstanding profitability improvement. We reported operating income of $13.1 million up from $8.8 million in the first quarter of 2020. On an adjusted basis, operating income increased $5 million to $14.4 million in the first quarter of 2021, or 5.1% of net sales versus 3.6% of net sales in the first quarter of 2020. The higher profitability reflects continued good work from our merchant and sourcing teams and disciplined expense management across our organization. Our cash flow and balance sheet are strong and position our company for long-term success. Our strong first quarter results reflect continued progress on our strategic pillars of people and culture, improving the customer experience, driving traffic and transactions, and improving profitability. Our first strategic pillar, people and culture, is a critical driving force behind our transformation strategy. During the first quarter, we communicated our new vision and purpose and rolled out a new set of six core values and commitments across our organization that directly shapes how we will interact with our associates and customers. We also reinforced our commitment to an inclusive, diverse team and a culture which understands, values, and adapts to the needs of our associates and customers. We remain steadfast in this commitment to demonstrate respect and tolerance to all groups through our words and actions to our associates and customers alike. To support this, our Diversity, Equity, and Inclusion Task Force has scheduled diversity workshops that will roll out through the organization over the coming months. And we are fostering an open dialogue with our associates, We completed the company's first culture survey, and we have already begun to respond to recommendations and feedback as we build a cohesive, inclusive, high-performing team. A second pillar is improving the customer experience. Our customers expect a seamless, omnichannel experience. One of the key benefits of our new digital platform is increased engagement on mobile. Across the industry, roughly 80% of customers start their flooring journey online, and mobile is increasingly their preferred way to shop. In February, we launched our new mobile app featuring our popular Picture-It and Floor Finder tools and making it easy to order installations. We are pleased with the customer engagement and conversion we are generating through mobile. Installation is a key service we provide that enhances the customer experience. First quarter installation sales increased year-over-year, and the rate of year-over-year growth accelerated sequentially from the fourth quarter of 2020, underscoring growing momentum in our installation business. New installation assessment trends indicate demand for installation services remains strong. Providing a seamless installation experience for our customers has been facilitated by the new in-store portal that we rolled out in December to enhance visibility to our customers' installation projects, increase efficiency for our store associates, and reduce turnaround time for our customers when quoting new jobs. In addition, in mid-March, we launched a new installation services section of our website that centers around the customer. ranging from easy to read content with useful tools and links to more detailed information for those interested in learning more. It also features before and after customer project testimonials. This educational content is helping drive stronger demand for installation assessments. Expanding our business with pro customers is foundational to our growth and transformation strategy. Building strong relationships with pros is our top priority, and we continue to reinforce that with our store associates through our trial, scale, and retention programs. We continue to build our pro value proposition, and as such, we are making it easier for pros to engage with us. For example, in early March, we launched new everyday pricing for pros, which our pros are telling us is highly valued and makes it easier for them to consistently quote jobs. And we continued to execute our outside pro account rep program. While our first quarter pro comp was flat versus last year, we saw higher sales and orders per pro that originated from our trial, scale, and retention program, reflecting the increasing quality and value we are generating by building strong relationships with pros. Turning to our third strategic pillar of driving traffic and transactions, for the first quarter, our web sales increased more than 70% versus last year. We're continually improving the features, tools, and online functionality on our llflooring.com digital platform to engage and delight shoppers and boost conversion. The quality and value of the flooring assortment we offer is reflected in our recently launched spring seasonal catalog, which presents beautiful on-trend and sophisticated floors as well as style insights. And we are publishing weekly blogs of home decor inspiration through our LL Style online content platform. Our trend right assortment makes us a leading destination for both retail and pro customers. With more than 400 varieties of hard surface floors, featuring a range of quality styles, we continue to offer customers quality choices. And our expert sales associates provide the high touch service and advice to help our customers achieve their flooring project needs. We are driving innovation and delivering on-trend flooring that resonates with how people want to experience their home environments today, whether that's simple luxury or bold patterns and designs. During the first quarter, vinyl plank and solid hardwood were again our top performers. We've expanded the number of wide-width SKUs in our vinyl category, and our best-in-class wood assortment remains a key competitor of Varnish. Our brand revitalization progressed during the first quarter, with our pilot stores trending ahead of comparable control stores in terms of new order dollars and pro new order dollars. We continued to evolve the presentation of our new brand in our advertising, with LL Flooring moving to the primary position versus Lumber Liquidators. This helped drive key gains in awareness, familiarity, and consideration for LL Flooring based on our national tracker, which are important milestones to ensuring a much more relevant brand in hard surface flooring. Fourth, improving profitability. Our adjusted gross profit of $109 million for the first quarter of 2021 improved $4 million from the first quarter of 2020. And despite the reinstatement of Section 301 tariffs, our adjusted gross margin of 38.5% was down only 80 basis points from the 39.3% in the first quarter of 2020. Our merchant and sourcing teams executed well to partially offset the impact of the Section 301 tariffs through pricing and promotion strategies and, to a lesser extent, alternative country sourcing efforts, reflecting continued progress on our strategy to diversify sourcing away from China. In addition, we improved adjusted SG&A spend to 33.4% of sales from 35.7% in the first quarter of 2020. We continue to focus on more efficient digital marketing spend versus other traditional channels, and we maintain disciplined expense management. Our first quarter adjusted operating profit was $14.4 million, up from $9.6 million in the first quarter of 2020. Our adjusted operating margin was 5.1% compared to 3.6% in the first quarter of 2020. Nancy will share more details on the quarter in her remarks. We remain focused on executing our transformation plan and making progress against our strategic pillars to position us for long-term success. I want to briefly update you on recent developments under each of our four pillars. First, let's start with our people and culture. We've selected a new learning management system to provide enhanced training content across the organization for all associates to maximize performance, improve the customer experience, and strengthen our associates' expertise. Moving to improving the customer experience, In April, we launched a new pro web experience that allows pros to see their exclusive everyday competitive pricing, allows them to extend that special pricing to their customers, and gives them visibility into our inventories and their job history. Making the shopping experience easier and more compelling to pros strengthens our value proposition and reinforces LL Flooring as their go-to partner. and we've received very positive feedback on this experience to date. Turning to our objective of driving traffic and transactions, we've strengthened our omnichannel capabilities with new tools to help drive traffic and transactions with customers. Customers have responded extremely well to our Picture It and Floor Finder tools, where they can find a floor they like on our website or app, take a picture of their room, and see how the floor will look in their space. And we're enhancing these tools with additional functionality such as improved catalog and navigation. We have just begun to take advantage of the power of our new digital platform and website that gives us more agility and speed to better showcase our flooring and service and drive traffic to our stores. We're excited about our product innovation pipeline for 2021. with a steady schedule of new product launches supported by digital campaigns, website, and in-store promotions. We are prioritizing digital marketing to tell the story of our new brand and expanding our efforts on search and social where our customers begin their inspiration journey. During the first quarter, we produced a new brand campaign to introduce the next chapter in the LL Flooring story, reinforcing our flooring expertise, high quality, trend right assortment, and building familiarity around the new brand. The campaign kicks off this week and will be reinforced online and through an enhanced presence on social media. We're looking forward to the broad scale rebranding of our stores that we anticipate will occur primarily in 2021. This will include a new mark on the outside of our stores, replacing lumber liquidators with LL flooring, and every store will have updated and redesigned interior signage that reflects our new brand. Finally, we continue to work on improving profitability. There are numerous factors in the MACRA environment making it hard to predict how consumer spending on home improvement will unfold in 2021. Given the uncertainty caused by these factors, we are not providing financial guidance for 2021 at this time. That said, we would like to share some color around our outlook and approach for the remainder of the year. First, on the positive side, we're seeing continued tailwinds to existing and new home sales, home valuation appreciation, and demand for homes exceeding available supply, all of which we believe are supportive of home improvement projects. In addition, U.S. consumers have healthy savings and increasing confidence based on recent stimulus measures and a strengthening job market. That said, we're navigating current international supply chain disruptions. Container availability continues to be highly constrained and we expect it to be volatile over the upcoming quarters. We're continuing to monitor this, including the potential impact of the recent Suez Canal disruption. Domestically, hardwood supply continues to be constrained. Similar to the fourth quarter of 2020, we believe we could have captured more sales in the first quarter of 2021 if our inventories had been higher. Our supply chain teams are working diligently to bring in new inventory and allocate it effectively across all our stores. In the second half of fiscal 2021, we will be up against more difficult sales comparisons with the third quarter and fourth quarter of 2020 comparable sales increases of 10.9% and 10.5% respectively. The impact of COVID-19 is mixed. On the positive side, more than 145 million in the U.S. have been vaccinated, which should underpin the sustained economic recovery in 2021 and beyond. However, we are monitoring the number of cases in the U.S. which could dampen consumers' willingness to have pros and installers enter their homes. And while there is still strong consumer demand for home improvement spending, we are watching how much consumers may expand their spending into other areas such as travel and leisure as 2021 unfolds. Amidst these positive factors and potential challenges, our team is focused on driving execution on our growth and profitability strategies. We have a robust pipeline of new innovative products. We are generating strong installation sales growth and building our value proposition for pros. Our new digital platform is driving traffic, and we're excited to expand the brand revitalization to more stores this year. Opening new stores is an important part of our growth strategy. During the first quarter, we opened three new stores as part of our plan to open 12 to 15 new stores this year. Turning to gross margin, as we demonstrated in the first quarter, our merchant teams are working hard to mitigate the impact of Section 301 tariffs. In addition to tariffs, we expect gross margin pressure from higher transportation and raw material costs as we move through 2021. To partially offset these headwinds, we will continue to execute our mitigation strategies, which primarily consist of pricing and promotion strategies and alternative country sourcing strategies. With respect to SG&A, we will maintain disciplined expense management. We plan to leverage our base SG&A expense year over year and reinvest expense savings in our growth initiatives, including new technology to improve the customer experience, investment in our teams, the opening of new stores, and investing in our pro customers. In summary, we are intently focused on executing our growth strategies to drive sales and profitability in 2021. With more than 400 varieties of hard surface floors featuring a range of quality styles and on-trend designs, we continue to offer customers quality choices while our supply chain teams work diligently to increase inventories. We will continue to pursue gross margin rate mitigation strategies and disciplined expense management to optimize profitability while investing in our strategies to position LL Flooring as the customer's first choice in hard surface flooring over the long term. I will now turn the call over to Nancy to share the financial details of the quarter. Nancy?