LL Flooring Holdings, Inc.

Good morning. Thank you for attending today's LL Flooring Holdings First Quarter 2023 Earnings Conference Call. My name is Megan, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to Bruce Williams from ICR. Bruce, 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 Terry Blanchard, Interim 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 Flooring's filings with the SEC. During today's 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. The information contained in this call is accurate only as of the date discussed. Investors should not assume that their statements will remain operative after today, and LO 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, Bruce. Good morning, everyone, and thank you for joining us today. During today's call, I will begin by reviewing our first quarter results and then discussing progress on our key operational strategies, including plans to improve sales productivity and profitability, which gives us confidence in achieving long-term sustainable growth. Terry Blanchard, our interim CFO, will then review our financial results in more detail and discuss our outlook before we open up the call to your questions. Now turning to our first quarter results. As expected, our first quarter performance was very challenging and our performance reflected the impact the difficult macro backdrop had on discretionary home improvement spending. In addition, we continue to experience pressure from brand awareness and operational challenges that impacted the first quarter results. Despite the near-term volatility, we remain focused on areas of improvement that will help stabilize our results and drive long-term growth opportunities. As a reminder, these areas are, one, further broadening and growing our brand awareness among consumers to drive traffic, and two, ensuring a consistent customer experience across that omnichannel network to improve conversion. Three, improving operating efficiencies by actively working to reduce costs while focusing investments on our top growth priorities. Importantly, we continue to execute on these areas during the quarter, which I'll discuss shortly. For the quarter, our total comp store sales were down 15.4%, driven by lower spending by consumers versus last year, combined with a decline in pro sales. As mentioned earlier, we believe the lower consumer sales reflected continued pressures from inflation and higher interest rates on discretionary spending, coupled with brand awareness and operational challenges. Notably, we saw a more significant pullback from the consumer starting in early March. Drilling down on the first quarter sales drivers, we saw a 4.2% increase in average ticket and an 8.7% increase in the average retail price per merchandise unit sold compared for the first quarter of 2022. The higher average retail price was driven by inflationary pricing. Conversely, We saw a 19.6% decrease in transactions compared to the first quarter of 2022, primarily due to lower consumer demand. Of note, we experienced our largest transaction declines from the west region, where the large concentration of stores, while Florida continues to outperform, driven by strong market dynamics. In regard to our pro sales performance during the quarter, we experienced less demand for larger ticket consumer projects as we believe the consumer postponed or canceled planned projects. Nevertheless, we remain very confident in our pro long-term strategy and our investment in the pro business. Despite the sales challenges during the quarter, adjusted gross margins improved slightly to 37.4%. On a gap basis, we reported an operating loss of $13.2 million, or negative 5.5%. On an adjusted basis, we reported an operating loss of 10.8 million, or negative 4.5%, reflecting lower sales and the SG&A investments we are making to support our long-term growth. We ended the quarter with a strong balance sheet and total liquidity of 157 million. Importantly, we ended Q1 with $47 million of debt, which was down from $72 million at the end of Q4. Terry will discuss the details of our first quarter financial results in a moment. Despite the external headwinds that we're facing, we remain confident in our ability to deliver the high-touch service of an independent flooring retailer combined with the value, assortment, and convenience of a national brand. To that end, we continue to execute on our strategic initiatives as we focus on improving sales productivity and profitability, as well as delivering on long-term sustainable growth. These initiatives are growing sales to pro-customers, building brand awareness, improving the customer experience, innovating new products. First, growing sales to pro-customers. A pro sales strategy remains a core growth pillar for LL. While we experienced a slight decline in the pro category in Q1, we have previously generated eight consecutive quarters of growth. We continue to build momentum with our national account strategy, which is being driven through execution by our inside and outside sales teams. As we look ahead, we will continue to invest in our pro strategy to further develop capabilities aimed at driving increased retention with existing pros. We believe that implementing our new customer relationship management CRM platform will be integral in helping to achieve these goals. Our CRM system not only ensures a single repository of key customer information so we know how best to meet their needs and wants, but also enables key triggers for future contact points during their shopping experience. We have made it a priority that our entire store team focuses on understanding each customer's unique story and project objectives. Whether we're chatting with customers online, engaging with pros in our store, or texting them about their material pickup, the CRM tool will help ensure we consistently execute more targeted messages for every customer. We plan to have completed our rollout for pro customers by early third quarter and for consumer customers by the fourth quarter. We expect to begin to realize early benefits from the implementation in the second half of 2023, and we're confident that this, combined with more targeted marketing, will drive efficient customer acquisition and improve conversion. Second, building brand awareness. We continue to focus on building brand awareness as a key area of opportunity to drive traffic and increase conversion to improve our sales performance over the long term. Since our rebranding from Lumber Liquidators, we have broadened our appeal as a national flooring destination, offering a one-stop shop for consumers who are seeking service and expertise from inspiration to installation. Our market research continues to tell us that the new LL Flooring brand scores significantly higher versus lumber liquidators on key metrics, such as product quality, assortment, and store associate expertise, which gives us confidence that we're gaining traction. As we said before, our unaided brand awareness remains low, however, and as a result, we're intensely focused on broadening brand awareness by investing in top-of-the-funnel marketing strategies that evolve our creative approach to increase relevancy, refine our media campaigns to increase efficiency, and expand our reach to increase exposure. Expanding on these three strategies. First, creative. We're on track to launch our new campaign in the coming months that communicates the LO flooring value proposition, highlighting the selection, expertise, assortment, and value. Second, efficiency. As mentioned, we're in the process of implementing a new CRM platform that will help improve the effectiveness of our digital marketing spend and strategy to increase conversion while lowering customer acquisition costs. And third, reach. We're expanding our network presence across lineal and digital media. Third, improving the omni-channel customer experience. We offer our customers a differentiated omnichannel experience that allows them to shop and purchase wherever and however they like. Many customers start their flooring journey online, and our online tools allow customers to easily navigate to their preferred flooring solution, make flooring selections, and place an order. We added additional capabilities to our home delivery services in Q1 to utilize our 440 stores and supply chain network. A customer has always been able to see inventory and pick up their product to any store they choose, but now we're allowing our online customers to have white glove or curbside delivery from the store to their home. This allows the customer to be able to do a same day or same week project when time is critical and not waiting for a delivery from a distribution center. In-store. We provide a one-stop shop for customers, including an unmatched breadth of product offerings, knowledgeable associates, and installation services that we manage through our network of independent third party contractors. In addition, our online call center serves as an additional resource for our customers as they embark on their shopping experience. It's important to our customers that we create a seamless experience across our omnichannel platform, and continue to improve the shopping experience by investing in our people and in technology. This complete omnichannel experience widens our competitive advantage over independence. Fourth, innovating new products. We're consistently focused on creating products that our customers will find both aesthetically pleasing as well as functional at a great value. To that end, 100% PVC-free Duravana brand has been very well received by our customers. It's our fastest growing brand and solves consumers' everyday living needs at a great value. Customers love the features of hard-surface flooring infused with proprietary waterproof technology, and we intend to continue investing in expanding the assortment of Duravana through this year. We believe that our growing assortment of proprietary brands will continue to differentiate us from our competitors. Lastly, I want to talk about our new category pilot. As we have rebranded to LL Flooring, we received feedback from our customers and our pro customers that they expected us to provide comprehensive flooring solutions for their projects, including carpeting. As a result of that feedback, we've launched a pilot adding carpet in four stores. We intend to extend our pilot to 20 additional stores by the end of second quarter. As a result of adding carpet, our current addressable market grows to $36 billion, driven by the addition of carpet of $13 billion. Again, this category expansion aligns with our brand repositioning to LL Flooring, which implies a broad selection of hard flooring, carpet, and installation services for our customers. While still very early, initial engagement has been positive from associates, consumers, and our pro customers. Importantly, our entry into carpet does not require any investment in our supply chain or in inventory as the product is direct shipped from the manufacturer to the installer. We will continue to keep you updated on the status of this pilot next quarter. Before turning to our outlook, I'm pleased to announce that we are opening a third distribution center in Dallas in Q3, which will further optimize our supply chain network. Opening a third DC will further improve our service levels and support our strategic growth priorities. It will also reduce transportation costs and optimize our supply chain efficiency over the long term. Now I'd like to take a few minutes to discuss our outlook for 2023. First, I would like to update you on the vinyl flooring-related customs delays originating from Vietnam. As we previously discussed, in February of 2023, the company began to receive detention notices from U.S. Customs related to flooring products that contain PVC as a consequence of the Uyghur Forced Labor Prevention Act. uflpa enforcement of the uflpa is having broad implications across flooring products solar panels cotton and other industries due to the customs delays during q1 we experienced continued delays which resulted in 2.4 million of incremental expenses and approximately 3 million of lost sales u.s customers is continuing to detain shipments within the vinyl product category, and we are diligently working to provide additional documentation that they are requesting. However, we do not have any visibility as to when these delays will be resolved and when held product will be released. We're continuing to work to mitigate the disruptions by featuring alternative products in our current assortment and leveraging our sourcing capabilities to look at alternative flooring categories and sourcing geographies. Despite our mitigation efforts, we believe that this issue could have further material impacts on sales and margins as we progress throughout the year. Next, we expect the macro backdrop to remain challenging as elevated inflation and higher interest rates drive a more cautious consumer and pressure higher ticket discretionary purchases. In the near term, this makes sales visibility more limited, However, we are focused on driving sales to the initiatives just discussed. In terms of margins, we continue to expect that merchandise margins will improve as we realize the benefits from freight cost relief to gross margin beginning in the second half of 2023. On the expense side, we recognize that cost structure is not aligned with our current run rate of sales. To that end, we've engaged consultants to undergo a comprehensive strategic review of our cost structure, and we will provide an update on future calls. In terms of liquidity, the strength of our balance sheet positions us to navigate the challenging macro environment. During Q1, we reduced our bank borrowings by 25 million and have availability under our bank credit agreement of 150 million, which we believe to be adequate. Importantly, looking beyond 2023, The medium to long-term outlook for repair and remodel spending remains strong, supported by tailwinds such as the aging housing stock in the U.S., new household formation by millennials, and the desire of baby boomers to age in place. With that as a backdrop, we remain confident in the long-term fundamentals of our business. We continue to work on each of our strategic priorities, and we remain focused on delivering long-term sustainable growth as a leading specialty flooring retailer. With that, I will turn the call over to Terry to review our first quarter results and outlook in more detail. Terry?