LL Flooring Holdings, Inc.

Good morning or good afternoon all, and welcome to the LL 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, you may do so by pressing star one on your telephone keypad. I will now hand you over to Julie McMeeding from Investor Relations to begin. So, Julie, please go ahead when you are 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 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 Florence'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 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 the two-year presentation is helpful to investors to understand the truer 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 after today, and LL Floring 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. I'm very proud of all that our associates accomplished in 2021 to deliver comparable store sales growth of 5.2%, an excellent service to our customers, helping them find the floors that they loved. 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 2021 to 2024. We also expect to deliver expanded operating margin by 2024, creating significant value for our stakeholders. On today's call, I will cover our 2021 performance, briefly touch on our 2022 outlook and dedicate most of my remarks to our 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 and 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 our 2021 performance highlights. In 2021, we made significant progress on our transformation initiatives. Through our team's effort, we posted record sales to pros, delivered record installation services revenue, grew total net revenue 5% and comparable store sales 5.2%, diversified our large network of global sourcing partners to launch new innovative product, and made significant progress in the transition of our brand repositioning to LL flooring. 2021 marked the second consecutive year of unprecedented macroeconomic disruption, which included supply chain constraints, accelerated inflation, labor shortages, and a continued impact from the COVID-19 virus. I want 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 a adjusted gross margin of 37.6%, down only 120 basis points from 2020, and up 60 basis points from 2019. At disciplined expense management held in 2021, adjusted SG&A is 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 4.7% of net revenue, delivering on our commitment to significantly improve profitability over the past two years, with our 2021 adjusted operating income up $29 million and adjusted operating margin up 240 basis points compared to 2019. Our balance sheet is strong. We repaid all $101 million of our debt, and we ended the year with total liquidity of $227 million. In short, in 2021, our team battled a dynamic and challenging macro environment to meet or exceed our customers' needs, deliver 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 revenues. As we communicated on our last call, consistent with the third quarter, we saw a decrease in sales to DIY customers, which pulled 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 all 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 variant, 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 emphasize is 2022 marks a year of investment in 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 LL 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 strongly believe we offer a compelling value proposition to customers as we provide a wide selection of high-quality stock products in the accessible flooring expertise and service of a local store with the scale, omnichannel convenience, and value of a national chain. We're confident in our team's ability to execute on the growth opportunity ahead and and we're looking forward to achieving our vision to establish LL Flooring as the 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 LL 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. Opening new stores is an important strategy that will help us both increase convenience and build awareness for the LL Flooring brand. Our plan for 2022 is to open 20 to 25 new stores, all in our standard format, which is an intimate 1,500 square foot showroom with an attached 5,000 to 6,000 square foot warehouse with deep in-stock inventory readily available for our customers. We are well underway with four new stores already open to date this year. We are targeting new white space markets and existing markets where we are understored relative to that market's potential. We are excited about launching an accelerated number of new stores in 2023 and 2024, with a target total of 100 new stores opened over the next three years. Second, grow sales to pro customers. Sales to 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 2021, we posted record sales to pros due to solid execution on our multi-pronged strategy. Our pro relationship program continues to drive greater pro customer retention and higher sales per pro customer. As we announced last quarter, we are pleased with the results from our outside pro account sales rep program, and we expect to nearly double the number of pro account reps in 2022 to better serve our pros. Pros value our dedicated everyday pro pricing and our pro website that make it easier for them to do business with us. The website shows them everyday competitive pricing and allows them to extend that pricing to their customers. The web experience also gives pros real-time access to inventory levels across stores as well as their job histories. This dedicated web experience allows pros to conveniently buy online and pick up from their local store our wide assortment of in-stock trend right floors. In 2022, we will build on these services to increase sales with Pro. 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 LL Flooring as a leading destination for hard surface flooring. We are pleased with the positive feedback we are receiving from pros and homeowners about our new brand. Our research shows that consumers perceive LL Flooring as superior to lumber liquidators in each of the brand attributes that we measure, such as expertise, product quality, and style. We have a strong marketing plan to build awareness for the LL 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 feature lighter interiors and clear signage helping customers select from our extensive offering of trend-right floors. And we plan to build on our breakthrough marketing campaign, Floor Love, which underscores our end-to-end solution from inspiration to installation and elevates our brand perception. We will evolve Floor Love to continue to speak to our core value propositions and of supplying 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 personal flooring experts in our intimate and easy-to-shop showroom setting. a great feature in our new stores is our interactive design center where store associates can collaborate with retail consumers and pros using our picture flooring visualizer digital tool next the digital experience we are continuously improving our ll flooring.com digital experience for customers Over the next three years, we plan to position LL Flooring as the go-to expert in flooring through a 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 perfect 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 and inspirational content to guide our customers through their journey. Next, the installation experience, which is one of the most important customer experience touchpoints. 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 as 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 bunch for us is our 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 to what suppliers had to offer to 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 TrendRight portfolio to be a leading destination for our customers. The biggest new product launch of 2021 was Duravana. which is sourced from Europe and represents a new industry-leading premium hybrid resilient flooring category. Duravana offers dual-defense waterproof performance, is dent- and scratch-resistant, and is eco-friendly and easy to install. We are very pleased with the continued strong sales of Duravana, and we are excited about the opportunity to expand this brand. Now I'd like to speak about our sixth 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 Doberman joined us in his new role. He 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 both chief digital officer and head of 600 company-owned entities of the Goodyear Tire and 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 omni-channel customer experience brand repositioning and marketing, and e-commerce. Welcome, Michael. Our people are critical to achieving our goal to become the customer's first choice in half service forward. 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, implemented a new learning management system called LL Academy, delivering significant training in the field. and 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, including 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, broadening awareness of the LL 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 to 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 2021 to 2024, coupled with expanded operating margin and 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 LL Flooring as the leading destination for hard surface flooring. I will now turn the call over to Nancy Wulff to share our financial details and outlook. Nancy?

Thanks, Charles. Good morning, everyone. Before I begin, I'd like to make sure everyone knows that I will 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 details. During the fourth quarter of 2021, we were very pleased to post double-digit growth in sales to pro customers and a 6.4% 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 pulled total net sales and comparable store sales down for the quarter on a one-year basis. For both the third and fourth quarters, 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. However, inventory in transit increased by $18 million versus last year. As a result, available inventory per store decreased 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 than in previous quarters. Encouragingly, we are pleased with the increase in inventory this quarter, and we expect to return to optimal levels by the end of the second quarter of this year, provided there are no additional disruptions to the supply chain during that time. Turning to our detailed financial results, we believe our two-year performance provides a better indication of the underlying strength of our business, giving the impact of COVID-19 on consumer spending and the 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 6.2%, versus the fourth quarter of 2020. This was due to an 8.1% decrease in net merchandise sales that was partially offset by a 6.4% 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 strategies, as well as favorable product mix as we sold more hardwoods and launched our new Duravana brand. We saw 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 4.2%, driven by 2.2% higher merchandise sales and a 17.2% increase in net services sales. Average ticket improved 20.4% and transactions decreased 16.6% due to lower DIY sales. Fourth quarter 2021 comparable store sales decreased 6.7% versus the fourth quarter of 2020, but increased 3.8% on a two-year stack basis. Turning now to gross profit. Adjusted 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 2019, 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 vendor sourcing strategies. 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. Excluding that benefit, adjusted gross margin increased approximately 130 basis points primarily reflecting our pricing, promotion, and alternative country and vendor sourcing strategies that 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 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 an approximately $11 million one-time benefit due to the retroactive exclusion of tariffs. Adjusted operating margin for the fourth quarter of 2021 was 3.8%, a decrease of 240 basis points from 6.2% in the fourth quarter of 2020. Adjusted operating margin decreased 330 basis points from 7.1% in 2019, excluding the approximately $11 million one-time benefit for 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 $104,000 compared to adjusted other expense of $1.2 million for the three months ended December 31st, 2020. 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 $474,000 or an effective tax rate of 4.4%. Excluding the impact of recognizing a $2.4 million benefit for state net operating loss adjustments, 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 year-end deferred tax true-ups, 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 $20.2 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 TARIC exclusion. Adjusted earnings per diluted share of $0.35 compared to adjusted earnings of $1.03 for the fourth quarter of 2020 and adjusted earnings of $0.57 in 2019. Recapping the full year 2021 results, net sales of $1.15 billion increased 5% compared to last year and 5.5% compared to 2019, with both increases driven by double-digit growth in sales to pro customers and net services sales that more than offset a decrease in DIY sales. 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 4.7% decreased 110 basis points compared to last year. The decrease in adjusted operating margin versus last year primarily reflects lower adjusted gross margins due to higher transportation and material costs, as well as paying 25% Section 301 tariffs on certain flooring products imported from China for a 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. The two-year improvement reflects higher net sales, disciplined SG&A management, and improvement in gross margins as our team more than mitigated increased material 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 adjustments 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 represented an effective tax rate of 25.3%. For 2019, we recognized income tax expense of $3.3 million, which is an 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 in 2020 and $0.54 in 2019. Turning now to the balance sheet. 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 31st, 2020. Total inventory improved $10 million versus last year as we continue to rebuild inventories to optimal levels. Our balance sheet and liquidity remain strong. As a reminder, we repaid the entire $101 million of outstanding debt during the second quarter of 2021. As of December 31st, 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 activities. 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 macroeconomic headwinds lessen. We expect to deliver positive net sales growth and comparable store sales growth for the full year, First half headwinds include the impact of Omicron on labor availability, inventory constraints, tough 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. The Omicron variant 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 expected first quarter 2022 comparable store sales to improve slightly on a percentage basis compared to down 6.7% 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, our growth initiatives gain traction, and macroeconomic headwinds less than in the second half. The biggest uncertainty in our 2022 plan pertains to gross margins. 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 contracts. 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 profits 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 in 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 to $32 million in 2022 to support our growth strategies, such as new store openings and to 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 are 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 strategies to drive top-line 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. As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. When preparing to ask a question, please ensure your headset is fully plugged in and unmuted locally. That's star one on your telephone keypad. Our first question today comes from Laura Champagne from Loop Capital. Laura, 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 the confidence. I'm assuming that – so the CAGR would be 9% top line over a 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? Thanks.

Thank you, and that's a great question. You know, 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 trajectory of sales growth in the second half of the year. What's really important is we've been working on a transformation strategy for the last 18 months, and we can see through our initiatives of our 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 omni-channel 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 a merchandising standpoint on innovating new products. So we spent a lot of time obviously building our three-year plan, looking at our markets, looking at our product portfolio, looking at market share and our 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 that LL Flooring has, over the old lumber liquidators will broaden the appeal into DIY. So we have a good, strong confidence that the numbers we've laid out are realistic and good objectives for us to be working towards. Thanks for the question.

Thank you.

The next question is from Seth Marshall from WebDush. Seth, your line is open. Please go ahead.

Thanks a lot, Ben. Good morning. A couple of questions. First, on the quarter itself, when you think about the inventory situation, how much do you think that last inventory impacted comps this quarter relative to last quarter?

Yeah, so good question, Seth, and good morning. We do believe that the quality of our inventory position from Q3 to Q4 accelerated the impact of lost sales, and particularly in our vinyl category, it took as long as to recover there, which really impacts the take-with customer, 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 in the fourth quarter after Q3?

Yeah, we haven't broken that out. I mean, we have internally, but we're not sharing that externally. But it was a significant element of our impact, particularly we recognize with our DIY business, which we're not happy with. And we've got a lot of work underway to continue to broaden that brand appeal with DIY customers.

Got it. Okay. I'm recognizing you're going to see improvement here in the first quarter and into the second. That should help drive improvements in comps. What about on the labor side? How much do you think you experience in lost sales because of labor shortages related to COVID or otherwise in the fourth quarter, and how do you think you got back to the first and second?

Yeah, so I'll go to the first quarter. As Nancy said, we had pretty significant impact with the new variant in January. Coming into the end of December, as a lot of retailers reported, our coverage in many of our stores was severely impacted, and that's why we made the decision to fully closed for three days. And again, we haven't broken out the exact impact. But 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 our 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 days as we prepare for the acceleration of our spring selling season. So I think that there clearly was a COVID impact, but people were struggling through Q3, beginning of Q4, just on where labor was thinning. And our teams in the field have really done a good job of attracting in talent and filling in slots to make sure that even with COVID, we're getting better hiring coverage in our stores.

Got it. Thank you. And then as it relates to the price increases that you're taking pretty broadly, what kind of resistance are you seeing from customers? Are you seeing any signs of trade down there? And how do you check that to impact unit sales in 2022?

Yeah, you know, it's interesting, Seth. I was looking at it yesterday and talking to folks in our field. You know, we have not seen a slowdown of our better and best categories. You know, we introduced Urvana as a premium product, and teams in the field have just done an outstanding job of positioning that product with customers. So I actually think that, you know, as people are doing more remodeling, you know, our pros are seeing their 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 the customers look at, right, we're not getting pushback on the premium end of our business or the mid-tier of our business. For sure, I think there's broader concern of the mass impact of inflation and what the whole customer's wallet looks like. But certainly when you talk to our pros, their pipeline is full out, many of them out through 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 do their remodels. And I think, you know, a lot of it is where companies are allowing people to work from home on a hybrid basis. It looks like on a go-for basis, people are looking at how are they going to use their homes. There 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, and flowing through into the flooring business.

Thank you. And then lastly, on the margin outlook for 2022, can you be any more specific, Nancy, of how much impact you think you'll see on SG&A margins from your investments and how you should think about operating margins overall year-over-year in 2022 versus 2021? Hey, Seth.

So in 2022, you know, we keep talking about the biggest uncertainty for us is what's going to happen with gross margin. And 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 the promo and sourcing strategies 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, you know, 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 23 and 24. And we would expect that to moderate. as we increase the sales in the out years.

Understood. Do you care to try to quantify the SG&A impact or how to think about where your best guess, where operating margins will land in 22 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, you know, based on the things that we're investing in this year in terms of the new store openings, we've certainly quantified that it's 20 to 25 new stores. The work that we continue to do to expand our pro sales teams, all of the customer-facing org changes that we've made, as well as, you know, continuing to invest in technology and digital enhancements, we are going to run higher from an SG&A perspective than you saw in 2021.

Seth, I would point you to... Thank you very much. Seth, I will just point you to our comments in terms of what we expect out of our three-year growth plan at $1.5 billion. We expect that to be accomplished with expanded margins. So, again, as we come out and meet with folks, we'll 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.

Understood. Thank you very much, and good luck.

As a final reminder, if you'd like to ask a question, that's star 1 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 our 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 line.