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spk03: Hello, everyone, and welcome to the LL Flooring Second Quarter 2022 Results Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I'd now like to hand the call over to Julie McMeeden, Vice President of Investor Relations, to begin. Julie, please go ahead.
spk00: 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 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 their 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 Flooring undertakes no obligation to update any information discussed in this call. Now I am pleased to introduce President and CEO, Charles Tyson. Charles?
spk02: Thank you, Julie. Good morning, everyone. On today's call, I will review our second quarter performance, our outlook on the current economic environment, and progress on our strategies to position LL Flooring for long-term growth. First, I would like to start by thanking all of our associates for their continued dedication to providing outstanding service to our customers and delivering on our LL Flooring brand promise. We offer a compelling value proposition to customers with the selection, expertise, and service of a local store combined with the scale, convenience, and value of a national chain. Even though we reported comparable store sales down 3.1 percent during the second quarter, We're pleased to report that our teams delivered our fifth consecutive quarter of double-digit growth in sales to pro customers, opened six new stores, and rebuilt our inventory levels. The decrease in comparable store sales reflected continued lower spending by consumers versus last year, which we believe reflected pressure from inflation and higher interest rates and their preference to spend more on travel and entertainment. In spite of the challenging consumer spending environment, our teams are keenly focused on executing our growth initiatives. Second quarter adjusted operating income of $5.9 million, or 2% of net sales, reflected higher SG&A expense due to the investments we're making to support our long-term growth and our investments in customer-facing and distribution center personnel. We'll also continue to experience supply chain cost pressures on gross margin. Our balance sheet is strong. We grew inventory to $359 million and have total liquidity of $187 million. During the second quarter, we repurchased $7 million under the share repurchase authorization approved by the Board earlier this year, underscoring our confidence in our long-term growth and profitability. Turning now to our perspective on inflation, the supply chain, and consumer spending, and how these factors impact our future outlook. During the second quarter, we were largely able to offset more than 1,000 basis points of inflationary pressures from higher material and transportation costs. That compared to over 1,000 basis points of gross margin headwinds in the first quarter of 2022. We plan to continue to use pricing, promotion, and sourcing strategies offset higher costs, but there remains significant uncertainty around the impact of inflation on consumer spending and our ability to continue to pass on sufficient pricing to cover increased costs. From a supply chain standpoint, we're pleased to report that we've rebuilt our inventory levels after an extended period of supply chain constraints. In addition, we now import only 12 percent of goods from China, down from 22 percent a year ago. I want to congratulate our merchant and sourcing teams for building a more diverse global sourcing strategy. We expect higher international and domestic transportation costs to persist throughout 2022, reflecting both higher container rates and diesel costs than last year. During the second quarter, we saw consumers continue to shift their spending away from home improvement towards travel and entertainment, and we expect that trend to continue throughout the summer. In the near term, we see continued pressure on consumer spending due to inflation, rising interest rates, and uncertainty in the economy, including the employment outlook. As a result, we are more cautious on our outlook for the second half of 2022 and may not be able to deliver positive comparable store sales on a full-year basis. Accordingly, we are diligently managing our operating expenses and looking for opportunities to reduce them in order to preserve profitability and liquidity, while continuing to invest in our six strategic pillars that will position LL Flooring for long-term growth. Despite our near-term caution on consumer spending, We feel good about the underlying strength in home remodel trends and the demand for hard surface flooring over the medium to long term. There are numerous tailwinds for home remodel spending. To highlight a few, hard surface flooring is expected to continue to grow faster than soft surface flooring over the next several years. Home equity is at an all-time high, and the housing stock is aging, and the new home market has been underbuilt for years. More people continue to work from home, and the large millennial cohort is becoming a meaningful first-time home buyer. In order to capitalize on the strong medium to long-term trends for the home remodeling and hot surface flooring business, we remain committed to investing in our six strategic pillars that will position us for long-term growth. Today, I want to highlight progress on three pillars underscoring our confidence. in achieving our long-term growth objectives. First, grow sales to pro customers. Sales to pro customers are a key component of our long-term growth strategy and well aligned with the long-term opportunity we see in the home remodel industry. We're very pleased with the traction we are gaining on this initiative. Our teams are doing an outstanding job of executing our multifaceted strategy to make LL4ing the go-to destination for pros. Our strategy is anchored by our pro relationship program, which continues to drive greater pro customer retention and higher sales per pro customer. We're building and strengthening relationships with pros through a team of local store talent, outside pro account reps, and an inside sales team. Based on the strong results our pro team is delivering, we have accelerated our investment in this team. We believe a distinct competitive advantage we offer to pros is our dedicated everyday pro pricing that positions us highly competitively in the marketplace and our pro website that makes it easier for pros to do business with us. We continue to build awareness with pros. We've developed a pro digital marketing strategy that allows us to deliver value to the pro by communicating with them based on their needs. We are still very early in our journey with pros, I want to thank our pro team for their strong execution and continued dedication in growing sales to pros. Second, accelerating new store openings. During the first half of 2022, we opened 13 new stores and we're expected to open between 20 to 22 new stores in 2022. Opening new stores is an important strategy that will help us both increase convenience and build awareness for the LL Flooring brand. Each of our new stores features design centers where our store associates can collaborate with homeowners and pros to find the best floor for any vision or project. Our stores are stocked with locally curated selection from leading assortment of over 500 high-quality on-trend hard surface flooring SKUs all delivered at a compelling value. With a warehouse attached to our showrooms, our stores can easily start what our pro-customers homeowners want, giving us an advantage over smaller independent retailers. And our team of experts are ready to take care of customers who want a full-service solution by arranging for professional installation by independent contractors. Third, improve the customer experience to deliver on the brand promise. We continue to make progress on our long-term journey to build brand awareness and equity and establish LL Flooring as the leading destination for hard surface flooring. While building awareness for LL Flooring will take time, we're excited about our potential to serve a larger audience of consumers and pros who value a high-touch, full-service offering. Our brand research shows that the new LL Flooring brand scores significantly higher on product quality and assortment, and store associate expertise versus lumber liquidators. The physical rebranding in our stores is progressing well. We've completed the rebranding of all our store interiors, and we are on track to complete all external rebranding by year-end. Our rebranding to LL Flooring has opened up our sales funnel and consideration set to a broader group of customers, including those referred by pros who are confident in recommending our new brand and remodeled stores to their customers. We are positioning LL Flooring as the go-to expert in flooring through our comprehensive, omnichannel experience spanning our website, inside customer sales team, and 437 stores located nationwide and staffed by a team of high-service associates. As part of our staff development program, We offer store associates the opportunity to move into an inside sales role, which provides a win-win for both our associates and our customers. We're pleased with the performance of our experienced inside sales team, and we're adding talent to this team to help drive our omnichannel customer experience and sales. In the face of an uncertain consumer spending environment, our teams are focused on controlling what we can control. Executing our strategies to achieve our long-term goal of $1.5 billion in net sales with expanded profitability. Today, I detailed three of our six strategic pillars to drive long-term growth. We're really excited about all of our growth initiatives underway. Grow sales to pro customers, accelerate new store openings, broaden new brand awareness, improve the customer experience, innovate new products, and develop our people and culture. Execution on these strategies will help us grow our market share and position LL Flooring as the leading destination for hard surface flooring. In closing, during the second quarter, we delivered strong pro sales, opened six new stores, and rebuilt our inventory levels. In the near term, consumers continue to be challenged by inflation and higher interest rates. but we feel good about the underlying strength in our business long-term. We're demonstrating increasing traction on our growth strategies that we believe will position LL Flooring for long-term success, and we continue to invest to drive our growth. We have a strong balance sheet and liquidity to support our growth as we position LL Flooring as the leading destination for hard surface flooring. I will now turn the call over to Nancy to share our financial details and outlook. Nancy?
spk01: 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 second quarter results press release for more details. Turning to the second quarter results, our associates faced significant consumer spending headwinds to deliver second quarter results that improved sequentially from the first quarter. Net sales of $299 million decreased to $2.4 million, or 0.8%, versus the second quarter of 2021. This was due to a 0.8% decrease in net merchandise sales and a 1.1% decrease in net service sales. We saw an 18.9% increase in our average ticket, primarily reflecting a higher merchandise average ticket. the average retail price per merchandise unit sold increased 14.7%. The higher average retail price was driven by pricing and promotion strategies, as well as favorable product mix, which primarily reflected the launch of our Duravana performance flooring brand. We saw a 22% decrease in transaction count compared to the same period in 2021, largely reflecting the decrease in sales to consumers. Second quarter 2022, comparable store sales decreased 3.1% versus the second quarter of 2021, but increased 6.9% on a three-year stack basis, demonstrating improvement from pre-COVID levels. Turning now to gross profit. Adjusted gross profit was $108 million in the second quarter of 2022, compared to $113 million in the second quarter of 2021. Adjusted gross margin was 36.1% for the second quarter of 2022, compared to 37.4% for the second quarter of 2021. The 130 basis point decrease in second quarter 2022 adjusted gross margin versus 2021 primarily reflects significantly higher material and transportation costs, which were collectively up more than 1,000 basis points. that we were able to partially mitigate through pricing, promotion, and alternative country and vendor sourcing strategies. When compared to 2019, adjusted gross margin expanded 90 basis points, which is a reflection of our factory direct sourcing model and new product innovation. Adjusted SG&A expense for the second quarter of 2022 was $102.1 million compared to $95.8 million in 2021. primarily reflecting increased investment in our growth strategies, higher advertising expense due to the timing of promotions, and continued investment in our customer-facing and distribution center personnel. As a percent of net sales, adjusted SG&A for the second quarter of 2022 was 34.1%, an increase of 230 basis points from the second quarter of 2021. Even as we increase our investment and growth initiatives, we continue to maintain disciplined expense management and obtain savings that can be reinvested in growth. Adjusted operating income in the second quarter of 2022 was $5.9 million, compared to $16.9 million for the prior year period, due primarily to higher SG&A spend to support our growth initiatives and increased gross margin headwinds. Adjusted operating margin for the second quarter of 2022 was 2%, a decrease of 360 basis points from the second quarter of 2021. In the second quarter of 2022, we reported adjusted other expense of $116,000 compared to adjusted other expense of $498,000, so the three months ended June 30, 2021. The decrease in other expense was driven by the decrease in outstanding debt versus the second quarter of 2021. In the second quarter of 2022, we recognized income tax expense of $1.7 million or an effective tax rate of 38.7%. This compared to income tax expense of $4.1 million or an effective tax rate of 25.6% for the second quarter of 2021. The higher effective tax rate in 2022 was due to the greater impact of permanent items on lower pre-tax income this year. Adjusted earnings for the second quarter of 2022 of $3.7 million decreased by $8.5 million compared to the second quarter of 2021. Adjusted earnings per diluted share of 13 cents compared to adjusted earnings per diluted share of 41 cents for the second quarter of 2021. due primarily to lower adjusted operating income. Turning now to the balance sheet. We feel good about rebuilding our inventory. Merchandise inventories at June 30, 2022 increased $104.4 million from December 31, 2021, primarily due to increased purchases to replenish inventory, as well as to a lesser extent, inflation. Compared to pre-pandemic optimal levels in 2019, our units have increased, and we expect units to moderate as we move throughout the year. The current inventory balance also reflects significant cost inflation compared to 2019. Our balance sheet and liquidity remain strong. As of June 30, 2022, we had $187 million of liquidity comprised of $5 million of cash and cash equivalents, and $182 million of excess availability under the credit agreement. We ended the second quarter with $15 million outstanding on our credit agreement. This increase in debt versus the second quarter to last year reflects our use of cash for inventory purchases. For the first six months of 2022, we used $76 million of cash flow for operating activities, primarily due to replenishing our inventory, partially offset by increased accounts payable and net income. Turning now to 2022, we continue to navigate uncertainty in the macroeconomic environment related to inflation, consumer spending, global supply chain disruptions, COVID-19, and a challenging labor market. As a result, we are not providing financial guidance today. Given near-term consumer spending headwinds, we are more cautious on the second half of 2022, and we may not be able to deliver positive comparable store sales on a full year basis. With respect to gross margin, we continue to expect the impact of higher transportation material costs over the turn of inventory to be higher in 2022 versus 2021. 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, we remain committed to making investments that are critical to driving long-term growth. These investments will support our goal of $1.5 billion in net revenue, coupled with expanded operating margin over the long term. Our 2022 SG&A investments in our long-term growth initiatives are primarily driven by investing more in our customer-facing organization, opening 20 to 22 new stores, expanding our pro-sales team, and investing in technology and digital enhancements to improve the customer experience. The increase in spend to support these investments is more than offsetting our efforts to secure savings in our underlying business. As a result, we expect SG&A dollar spend and as a percent of net sales to increase in 2022 compared to 2021. From a capital allocation perspective, our balance sheet and liquidity are strong supporting our plans for growth. We plan to invest in CapEx in the range of $23 to $25 million in 2022 to support our growth initiatives such as new store openings and to complete our store rebranding as well as to increase operational efficiency. In summary, we delivered second quarter results that improved sequentially from the first quarter. While the near-term consumer spending environment has made us more cautious In our outlook for the second half, we remain focused on investing in our strategies to support our long-term growth. Thank you all for your time this morning. With that, I'll ask the moderator to open the call to questions.
spk03: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, that's star followed by one now if you wish to submit a question. Our first question comes from Laura Champion of Loop Capital. Laura, your line is now open.
spk04: Thanks for taking my question. I just wanted a little more color around what you're seeing that causes you to lower the sales outlook, meaning when did sales soften? How materially are they softening from a transaction perspective? You're already running down 20%. And is this more concentrated in the direct consumer versus small pro or contractor side?
spk02: Yeah, good morning, Lauren, and thanks for the question. Two things. One, we continue to be pleased with the investments that we've made in our pro business. And as we said on the call, the results that we're seeing in our pro business, obviously that means we've got some headwinds in the consumer segment, particularly in And, you know, we're being cautious. You look at the external environment from an inflation perspective, spending switching to leisure and travel, and what could be the potential of consumers if inflation was to continue and accelerate, pulling back from discretionary spend. So we're being cautious. We're looking at our cost structure based on that cautious approach. But we continue to lean into our growth strategies. So I think we're looking at the external environment and being cautious in what we're seeing from a consumer sentiment perspective.
spk04: So is it fair to say that this is more of a forward-looking? When you look at the macro, you can't be as optimistic, but it doesn't necessarily reflect a downshift that you've actually seen in your trends. Is that a reasonable statement? Thank you.
spk02: Yeah, so I'm not going to comment about the current quarter or future quarters. You know, we continue to invest in our growth agenda and in our six pillars. We will open stores this year at an accelerated rate from previous years. We put more investment into our pro business. So we have strong confidence in where we're making investments to grow our the long-term health of this brand as a flooring specialist. But we are being cognitive of an external environment that has a lot of uncertainty, and we're operating appropriately based on that. Got it. Thank you.
spk03: Thanks, Laura. Thank you. As a reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. Our next question comes from Seth Basham of Wedbush Securities. Seth, your line is now open.
spk05: Thanks a lot and good morning. My first question is on market share. I'd like you to comment on how you think you're doing from a market share standpoint over the last couple of quarters and if you've made any progress improving trends.
spk02: Yes, so good morning. Thanks for joining the call. So as I said on the call, we're really pleased with the progress that we're making both in our pro business and in our services business. We put more investments into those two parts of our business, both from a digital perspective and from a people perspective with both outside Salesforce, inside Salesforce, and driving a lot of training through our teams on our TSR program. As I said a few moments ago, we've seen headwind in consumer, which has offset some of the benefits that obviously in the total perspective we've been gaining in our pro business. So we continue to lean into that high service seeking customer. We like what we're seeing from an average ticket perspective with that customer as well as the feedback they give us around both the expertise that we have in our stores to deliver against that customer segment. And so we'll continue to lean in into the growth agendas that we're driving as we look for our long-term growth, which we, you know, we've said we want to grow 1.5 billion. We continue to lean into those dollars as we look to see what happens with the macro environment over the next six months.
spk05: You got it. So you're leaning into the high service seeking DIY customer, but losing more of the lower end DIY customers looking for that deal. Is there a point at which you change that strategy if you're not gaining enough traction with that high service seeking customer and you're picking a loose market share in DIY?
spk02: So when we look at the addressable market overall for flooring and the spaces of which we can add value in the market, we feel really confident in both the service seeker space and in the pro segments. And we'll continue to make investments to expand the reach of our brand. We've been really pleased, Seth, with the feedback that we get on the LL Flooring brand versus the old brand name. And that is for sure opening up the sales funnel. And as I've said before, this transformation is a long-term transformation of a brand repositioning that doesn't happen overnight. Doesn't mean to say we're abandoning DIY by any sense of the measure, but we are going to pick our place in the marketplace where customers feel really good about our value proposition. And we're going to continue to lean in and invest forward in creating a space for ourselves in the market.
spk05: Got it. Okay. And you talked to the possibility of not having positive comments for the full year, 2022. Are you also looking for non-positive comments in the second half of 2022?
spk02: So we're not going to give guidance on the actual second half. What I said before, and my answers to previous questions is we're being conservative based on the external environment. What we're seeing with the impact of inflation, consumers impact on discretionary spend I think there's a lot of noise in the consumer numbers right now we feel good about our core customers who you know have a higher average income over a hundred thousand high high equity in their homes and with the current state of the housing market and we have to see how that plays out with mortgage rates what happens to the remodel sector I think long-term we feel really good about our ability to meet the demands of customers that want to upgrade their homes. We're just being cautious as we look at the outlook for the macroeconomic environment over the next six months.
spk05: Got it. And then as it relates to the gross margins, did they come in in line with your expectations? And if not, where was the negative surprise?
spk01: Well, you know, we're not going to share those. specifics, we expected higher transportation costs and material costs. And so we've been using our sourcing, pricing, and promotion strategies to offset that. As we said in our prepared remarks, there was almost 1,000 basis points that we were able to partially offset. And we're showing improved margin versus 2019. So we believe that there's enough, as Charles mentioned, there's enough uncertainty that we don't know how that's going to play out going forward with the impact of inflation on consumer spending and how much we can continue to use our pricing and promotion strategies. But in general, we feel good about what we've done compared to 2019 overall in terms of improving our margins.
spk05: Okay. Is there more resistance in the marketplace to raise prices to offset some of these higher costs, either from a competitive standpoint or from a demand elasticity standpoint?
spk02: Yes, Seth, I'll respond to that. So we feel good about our competitive pricing position in the marketplace. You know, I think one of the questions is, you know, are we seeing customers trade down? And we're not. You know, we've continued to make investments in premium product, in repositioning the brand. You know, we've made significant investments in expanding the higher end of our engineered wood assortment, our introduction of our Duravana hybrid performance, which is a premium product, and we're really pleased with the balance of sale growth that we're seeing in that, as well as the premium end of lamina with the broader assortment in waterproof. And so, I think when customers really look at, as you said, 800 square feet in the home, cost per square foot, they're not making those tradeoffs down to a cheaper product. And so while there's been significant inflation in the industry, customers are not choosing to shortchange themselves in terms of both the quality and the look they want to get as part of their upgrades to their home.
spk05: Understood. Thank you so much.
spk03: Thanks, Seth. Thank you. As a final reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. We currently have no further questions, so I'll hand back over to Charles Tyson, President and Chief Executive Officer, for any closing remarks.
spk02: Thank you, operator. Thanks, everyone, for joining us today. I want to thank again our associates for all of their hard work and dedication. While the near-term operating environment may remain challenging, we feel confident in our growth agenda and the positioning of the LL Flooring brand in the marketplace. Wishing everyone good health and safety, and we look forward to updating you on our performance over the next quarter. Thank you.
spk03: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.
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