LL Flooring Holdings, Inc.

Please go ahead when you're ready. Thank you, operator. Good morning, everyone, and thank you for joining us. Today, I'm joined by Charles Tyson, our President and Chief Executive Officer, Bob Mador, Chief Financial Officer, and Andrew Wadhams, Senior Vice President, Retail and Commercial Sales. 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 Florian. Although LL Florian believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations of 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 LO Floring'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. Now, I would like to turn the call over to Charles.

Charles? Thank you, Bruce. Good morning, everyone. Joining me today, above my door, our Executive Vice President and Chief Financial Officer, and Andrew Wadhams, our Senior Vice President of Retail and Commercial Sales. During today's call, we will review our third quarter results and discuss progress on our key strategic initiatives as we work to position ourselves for long-term sustainable growth. Turning now to the quarter, we're disappointed in our third quarter results which continue to be negatively impacted by the macroeconomic environment, as well as internal challenges that we're focused on as we execute against our strategic initiatives. We've made progress on these initiatives, and we believe each initiative will improve sales productivity and profitability long term. We reported comparable store sales down 20.5% year over year for the quarter. Our decline in comparable store sales was due to continued slow traffic, as we believe consumers are pressured by elevated interest rates, inflation, and weakened existing home sales. In addition, we saw less spending per flooring project by both consumers and pros, as the average square footage project size continued to decline. We're still working through our brand awareness challenges from our transition to LL Flooring. as well as inconsistent performance across our store portfolio. I'm really excited by the recent additions to our leadership team who are targeting these areas, which we will discuss in more detail shortly. We've already begun to see improvement in our net promoter score quarter over quarter, which Andrew will expand upon further. For the quarter, we report an adjusted operating loss of 17.1 million, or 7.9%, primarily reflecting lower sales volumes, partially offset by efficiencies created by a new Dallas distribution center, and restructuring cost savings. In August, the board announced that they would be evaluating strategic alternatives to maximize shareholder value. The strategic review is underway, and I will not be providing an update or taking questions on it today. My priority and our management team's priority remains focused on executing against our long-term strategic initiatives and providing a differentiated flooring experience to our customers to significantly improve our performance. We remain committed to and continue to execute on our brand transformation and our five strategic initiatives, which are focus investments on our top growth priorities, grow brand awareness, drive product innovation, and ensure a consistent customer experience, and improve operating efficiencies. I believe that we're seeing promising signs that our strategic initiatives are starting to improve our capabilities. And this gives us confidence that we will return to growth as the economic environment improves, and in the long term, regain share in what we believe will be a growing industry that's driven by long-term tailwinds from hard surface flooring and remodels driven by aging housing stocks, increased household formation, and rising home values. First, we're focusing investments on our top growth priorities to drive sales, including further harnessing the capabilities of our customer relationship management CRM system to generate more opportunities, expanding our carpet offering across our stock portfolio, and delivering exceptional service to the pro customer. Our national rollout of CRM to all stores for pro customers was successfully completed in the third quarter. CRM is designed to create visibility to pro buying preferences, enabling us to communicate messages that customers value and ultimately deepen our relationship with pro partners and improve the ease of doing business with LL flooring. While early in its implementation, we've seen encouraging user-generated leads and conversion from those leads. indicating the right conversations taking place between the associates and pros, and we can now track and drive conversion much more effectively. We remain on track to roll out CRM capabilities for our non-pro customers by the end of the year. We expect that we'll gain greater visibility into the sales cycle and we'll engage with our customers earlier in the buying process and more consistently to have a higher probability of converting those customers. During the quarter, we extended our carpet pilot to 61 stores, and we expect to have carpet at 84 stores by the end of the year. We're pleased with the early results that we're seeing in these stores, as our goal to be a one-stop destination for complete flooring solutions is resonating with both pros and consumers, with a strong percentage of carpet transactions including both a hard and soft surface purchase. We expect to improve our carpet trajectory as stores mature, as we learn more about how to optimize carpet sales, and as we turn on the marketing of carpet, as carpet becomes more widely available in our system. Carpet is now fully supported on our website for those regions carrying it. We are not yet benefiting from the broad advertising of our carpet edition, and we're awaiting greater geographic coverage before doing so. Through the growth of our carpet pilot, we're further expanding our addressable market without requiring inventory investments by having the product shipped directly from the manufacturer to the installer. We started our journey in the first half of the year in three major metro markets and are now in seven major metro markets. As we expand the additional markets, we're generating learnings with each new market opening stronger than the initial markets. We intend to continue our carpet expansion throughout 2024, targeting 52 additional stores in Q1 of 2024. While we saw a sequential deceleration in our pro sales due to the market headwinds in renovation and remodel activity, we believe that implementation of our CRM system will equip our associates to drive our pro business differently as market conditions normalize. CRM enables a structured pursuit of pro business that focuses on proactive communication to our customers, driving more opportunities for our store and sales teams to serve. This new process allows us to offer a higher level of service to our pros by better understanding their project lead times and requirements and being able to work with them on a real-time basis to plan their future projects. We recently launched CRM outreach campaigns to a targeted segment of high potential pros and have seen encouraging results. We'll continue to deploy tactics connecting our store associates and marketing messages to our customers to drive higher retention. We believe the impact of CRM to build slowly each quarter as our associates learn how to maximize the use of it. We will also continue to expand our focus with national restoration accounts by launching several pilots in Q4, which we expect to drive new pro business as we move into 2024. Second, we're focusing on increasing brand awareness. We remain focused on enhancing our omnichannel brand campaign as we continue to focus on growing our brand awareness. Led by our new Chief Marketing Officer, Laura Massaro, we are making targeted adjustments to our marketing allocations to ensure the most effective deployment of our resources to drive customer acquisition and conversion. At the end of June, we launched a fully integrated campaign to break through the clutter of the category and drive traffic. We believe our marketing initiatives are creating a pipeline for potential future sales by driving high value actions like free samples and installation assessments, which have a strong correlation with sales. The marketing team has begun to generate opportunities from our investments in CRM and our customer data platform to improve media efficiency, personalization, and focused targeting as we shift spend from traditional channels to cost-effective digital channels to drive better reach and engagement. CRM will allow us to deploy marketing at the right time and the right place, allowing us to promote products and services that customers may need at the ready. Third, we're innovating new products. We believe brands that are innovating and creating new products will win in the long term. And we continuously build on the strengths of our merchandising and sourcing teams to enhance our product offerings. Durabana Waterproof Hybrid Resilient Flooring has been successful as a premium offering to our pro and consumer customers with its waterproof, dent resistant, scratch resistant, and eco-friendly PVC-free features, and we'll continue to invest in the brand and plan to further expand our product extortment through year-end. We're also excited to expand our PVC-free vinyl products offerings through Renature by Corallux in Q4. Renature is designed with 25% recycled materials, waterproof protection against everyday spills, Realistic looks with up to 30 unique plank patterns and a DIY-friendly click-locking installation. This innovative flooring takes a step towards a brighter future, representing the pinnacle of style, performance, and responsible manufacturing. Fourth, to discuss how we're ensuring a consistent customer experience across our omnichannel network, I'm joined by one of those key senior leadership additions, Andrew Wadhams. as Senior Vice President of Retail and Commercial Sales. Andrew brings 15 years of perspective and expertise to our team regarding defining our brand's offering, aligning and streamlining practices, and deepening connections to customers. Andrew, can you describe why you joined LL Flooring, what you've discovered to date, and what you are most excited about?

Thanks, Charles. I was initially drawn to LL Flooring because I saw a strong value proposition focused on delivering high-touch service for both pros and consumers. During my due diligence, I was excited by the positive feedback I heard from customers and the passion I felt around our high-quality portfolio of products. Now, I'm excited to add my experience to inform and drive our high-touch-oriented approach and create a superior customer journey that will further differentiate our brands, and enable us to deliver on our vision to become the customer's first choice for hard and soft surface flooring. During my first 120 days here, we've been focused on simplifying processes, developing our teams, and implementing and executing on our key initiatives. I want to thank the retail team for welcoming me, providing candid insights to accelerate my understanding and their receptiveness to new ideas around transforming our sales processes and business trajectory. During Q3, we saw consistent improvement in our NPS scores over Q2, validating that our work is resonating with our customers. While productivity and consistency across all stores continues to be below our expectations, we continue to refine our processes and invest in the activities our customers value most. We're simplifying the customer's e-commerce experience by making it easier to engage with us early in the sales cycle. During Q3, We increased our in-home flooring assessment appointments by 25.6% over Q2. If customers need help with their online chats or checkout, our call center agents are here to help them making real-time updates to their order through shared cart functionality to deliver a seamless experience. We've taken a leader-led approach to our key initiatives around CRM deployment. We elected to stagger our rollout across our stores to leverage key learnings. remove friction, and to list our pilot teams to cross-train their peer stores. While our teams are still learning to leverage this powerful tool, the rate of adoption and demonstrated competency in our CRM system is highly encouraging. Through this first-person, leader-to-leader, and peer-to-peer approach, we're driving the CRM pipeline behaviors that result in a higher value-added, customized approach to help us better serve and understand our customers. I expect the impact of CRM to build gradually as it becomes a natural part of our selling process and we learn to fully leverage CRM. Finally, we continue to make investments to develop, train, and retain our talent in support of our selling model. We're deeply focused on providing comprehensive flooring solutions to pros and consumers, all while delivering an exceptional customer experience. Further, we continue to reinvest in training to maintain a highly consultative and well-educated sales force across all our stores. 120 days in, I'm happy to confirm that my assessment of the opportunity with LL Flooring was correct.