LL Flooring Holdings, Inc.

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.

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?

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?