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spk03: Hello and welcome to today's LL Flooring Q124 earnings conference call. My name is Bailey and I'll be the moderator for today. 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 followed by one on your telephone keypad. I'd now like to pass the conference over to Bruce Williams with Investor Relations. So please go ahead when you're ready.
spk00: 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, and Bob Madura, 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 fellow flooring. Although L.L. Florin 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 L.L. Florin's filings with the SEC. During today's call, management will be discussing results on an adjusted basis. the 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 or 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?
spk01: Thanks, Bruce, and thank you for joining LL Flooring for our Q1 Earnings Conference Call. Joining me on the call is Bob Mador, Chief Financial Officer. During today's call, we will go through our first quarter results and provide an update on our strategic initiatives that we believe will position LL Flooring as the premier national specialty retailer that delivers the personal one-on-one expertise of an independent with the value and scale of a national retailer. Our first quarter results continued to be challenged as weaker existing home sales Elevated interest rates and inflation have led to softness in home improvement, remodel, and big-ticket discretionary spending. These challenging macro factors have pushed home improvement spend per housing unit below its 50-year average, impacting the remodel industry. The leading indicators continue to predict that spending on remodel activity will remain challenged through 2024. Now I will review our first quarter results. we continue to experience pressure from the macro environment. With that said, we believe that we are also impacted by our low brand awareness. During the quarter, we took steps to increase our brand exposure through brand partnerships to drive consumer sales, and we also focused marketing initiatives to drive awareness with our pro customers, which I will address later. We are also making progress on closing the gaps in store execution, which our field teams are aggressively tackling. Total revenues declined 21.7%, and comp store sales declined 21.5%, driven by continued declines in traffic, as well as lower average project sizes from our consumer, and to a lesser extent, our pro customers. Despite the market challenges, the company experienced several positive highlights worth noting. Our West region, which was our most challenging region over the last several quarters, saw a significant improvement as execution of our strategic initiatives in the field began to take hold. This was largely offset by headwinds, specifically in Florida, as that marked anniversary last year's major hurricane impact. During the quarter, Our field teams did a good job of accelerating our proactive selling and outreach to pros, and we added new capabilities to our e-commerce site. As a result, we experienced a sequential improvement in new orders driven by a meaningful pickup in our digital business and an improvement in both consumer and installation services. Notably, we continue to see new order performance improve in April. driven by both an improvement in our pro business, where our teams are using CRM to drive new opportunities. For consumer, we ran our annual April sale, and consumers responded positively, driven by the tremendous values created by our merchandising teams. For the first quarter, we reported an adjusted operating loss of $28.7 million, primarily due to sales deleverage. While we're operating in a very difficult environment, we are actively engaging in a number of initiatives to improve our liquidity and cost structure. First, our supply chain teams are doing an outstanding job effectively managing our inventory to improve our liquidity position. While we're managing our inventories to the run rate of sales, we're very pleased with our inventory position and we are in stock with quality product assortment that our customers expect. Second, we are pursuing a potential sale-leaseback of our approximately 1 million square foot Sandston, Virginia distribution center. We have also engaged Houlihan Lockheed to explore additional financing alternatives. Third, we know our expense structure is being negatively impacted by sales deleverage. However, we have several initiatives underway to actively address our operating expenses and are implementing further actions to reduce costs across the company. We believe that the macro challenges impacting project size and spending will remain in place throughout the year. However, we continue to be optimistic that the long-term tailwinds regarding home improvement spending continue to be in place driven by the aging housing stock, increased household formation, and also rising home values. When the cycle for home improvement spending normalizes, we believe that LL Flooring is in a unique position to gain share in this highly fragmented industry by providing the expertise of an independent retailer with national scale advantages. We are operating with a sense of urgency And to that end, we're focusing on executing against our strategies that we believe will have LL Flooring well positioned in the marketplace. As we look forward, we remain focused on executing on our brand transformation and our five strategic initiatives, which are investing in our growth priorities, which include growing our pro business, driving customer engagement through our CRM rollout, increasing brand awareness, and driving product innovation and carpet, and ensuring a consistent customer experience. For pro, I'm encouraged by the execution that our field teams are making against our pro initiatives. We implemented our CRM platform with the pro customers in the back half of last year, and we're seeing progress on moving from a transactional selling culture to a relationship-building culture with our pro customers. During the quarter, we took the learnings from the last quarter and we aggressively expanded our proactive selling outreach to lapsed customers. And while early, we experienced a strong improvement in retention and re-engagement of those customers coming back to the brand. In March, we executed a new pro-digital marketing campaign to emphasize our strong value propositions, such as product stock warehouses in every store one-on-one support expertise, and everyday pro pricing that positions us well in all segments of the pro marketplace. During the fourth quarter, we piloted our program in three markets to grow our business to national accounts. The program generated a sequential improvement in new orders in the first quarter, and as such, we've expanded the pilot nationwide. We rolled out CRM to consumer at the end of Q4, and we're beginning to experience an increase in the dollar value of opportunities for our DIY customers. This is a significant leading indicator for us as new opportunities in the pipeline lead to new orders and ultimately ship sales, while our proactive selling tools give us a better opportunity for conversion without having to rely on promotions and discounts. As it relates to our initiatives to improve the customer experience, we continue to see operational variability across the store network. We're focused on improving our underperforming regions and on improving the consistency of execution at the store level. I'm very pleased that our MPS scores increased to its highest levels across pro, installation services, and at the store level. Our scores are critical to us and demonstrate that we're improving as a partner to our customers. and providing value by being price competitive, being in stock, and building relationships with our customers. As we continue to firm up and deepen our field organization, we're seeing some improvement in regional variability. For example, our West Coast region has improved their execution, which has led to the West Coast region being our top performing region for the first quarter. As I mentioned earlier, we experienced a meaningful sequential improvement in our digital business. Customers are responding favorably to our added functionality, such as the launch of tender quotes, where consumers can pay for quotes online, driving faster conversions. In our hardwood business, we continue to invest in our Bellowood brand, driven by trend-forward species and finishes. The expertise of our teams on selling our wood value proposition clearly differentiates us in the marketplace, especially with our ability to drive an end-to-end solution from inspiration to installation. Our vinyl business saw significant headwinds due to both lower units and ASP declines the last year. The ASP declines were due to industry pricing pressure. as input costs have declined compared to last year. We expect pricing to normalize in the back half of the year as we anniversary this ASD pressure. We continue to make investments in innovation with our Renature by Corallox brand, which is a hypoallergenic product that's PVC-free, water, scratch, and dent resistant. We are also investing in our industry-leading, eco-friendly, Durabana line, which further differentiates us in this category. Within our carpet initiative, we added carpet to 58 more stores in the first quarter and ended the quarter with carpet in 142 stores. We firmly believe that strategically adding carpet to our category portfolio broadens our appeal to a wider audience that want the convenience of purchasing soft and hard surfaces under one roof. As a reminder, adding carpet requires minimal working capital commitment as product is shipped directly from the manufacturer. As our carpet penetration increases, we're expanding category awareness through marketing that highlights our carpet value proposition. In addition, we continue to enhance our product assortment and are also integrating installation services with our network to provide a seamless experience for our customers. Based on our strategy of building our product brand portfolio, we will continue to expand our carpet rollout to 75 additional stores in Q2. We believe that our low brand awareness has also contributed to our traffic challenges. However, we're implementing a variety of marketing strategies that are beginning to rebuild our customer pipeline. We are increasing our exposure by expanding our brand media partnerships such as our partnership with the NCAA during March Madness. We are leaning into messages that demonstrate our differentiated product offerings, like Bellawood and Duravano, and diversifying our channel mix to attract a new audience. Within digital media, we're gaining efficiencies with our spend, and we're also aggressively using our CRM tools to drive more direct marketing campaigns for our consumer customers. For example, using our marketing resources to re-engage our consumer database file and sending very targeted messages to customers that intend to and follow-ups to customers that are in various stages in the sales cycle. We believe that we have the tools in place that will drive greater returns from our marketing efforts. We are focused on unlocking additional cash cost savings. We have a number of work streams that are occurring with a mandate of rationalizing costs out of the system. While we have made significant progress with our working capital management, we believe there are additional opportunities to drive additional improvements. Lastly, we've also been disciplined around capital allocation and have lowered our expected capital spend for the year. Finally, before I turn the call over to Bob, I will note that last week we provided an update on the strategic alternatives review process, which we announced last August. In our update on April 29th, we reiterated that the board is committed to a fair process for all interested parties and will continue to thoroughly review any credible proposal received to determine the course of action that it believes is in the best interest of the company and all of its shareholders i will not be providing any further update or answering questions on that process at this time in conclusion the macro environment remains challenged for home improvement spending and we expect that challenges due to elevated prices higher interest rates and lower housing turnover will persist in 2024. however we are not standing still with laser focus on executing our five strategic initiatives, focusing on growing our pro business, continuing to drive customer engagement for our CRM rollout, increasing our brand awareness, and enhancing our product offerings through innovative products and expanding on our corporate initiatives, as well as ensuring a consistent customer experience. In addition, we will continue to be disciplined with working capital and aggressively and urgently manage costs and liquidity. I want to thank all our team members for helping to execute against our strategies while delivering excellent customer service that are reflected by our high NPS scores. Despite the current macro headwinds, we believe that executing on our strategic initiatives will have LL Flooring well positioned in the marketplace as the cycle normalized. I will now be turning the call over to Bob to share our financial details and outlook. Bob?
spk02: Thanks, Charles, and good morning, everyone. Today I'll walk through our first quarter financial results, and I'll be discussing certain non-GAAP adjusted numbers today. which eliminates certain items that are not indicative of our core business results. For full details regarding our financial results, please refer to our earnings press release on the investor relations section of our website. For the first quarter, business conditions remain challenged. Net sales of 188.5 million decreased 21.7% versus the prior year period. driven by continued declines in consumer and to a lesser degree in pro. Comparable sales decreased 21.5% year over year, driven by an 18.5% decline in comp transactions and a 3% decline in average ticket. Average retail price for merchandise units sold declined 4.4% compared to the first quarter in the prior year. Gross profit of 71.2 million decreased 19.1% or 16.8 million compared to the first quarter of 2023 and gross margin of 37.8% increased 120 basis points compared to the same period last year. Adjusted gross profit of 69.9 million, declined 20.3 million, and adjusted gross margin declined 40 basis points to 37.1% versus the same period last year. Lower transportation costs were more than offset by higher vinyl sourcing costs and lower ASP due to industry pricing pressures during the quarter. Adjusted SG&A expense of 98.6 million was 52.3% as a percentage of sales compared to 100.9 million or 41.9% of net sales in the first quarter of 2023. The decrease in SG&A and adjusted SG&A expense were driven by lower variable costs and savings realized by cost reduction efforts partially offset by expense deleverage from lower sales volume. As Charles has mentioned, we continue to optimize operating efficiency to right size our cost structure. Actions taken in the first quarter included operational restructuring and expense curtailment activities while continuing to preserve investments in our growth initiatives. Quarter to date, the SG&A reductions totaled approximately $4 million. Other expense for the first quarter increased $400,000 to $1.5 million. The increase in other expense primarily driven by higher interest expense due to higher average debt level. As a result, first quarter operating loss was $27.4 million compared to an operating loss of $13.2 million in the prior year. Adjusted operating loss, a non-GAAP measure, was $28.7 million compared to $10.8 million last year. Now turning to our balance sheet and cash flow. We continue to work diligently to optimize our working capital and right size our inventories to demand. To that end, inventories declined by $59 million or 19% year over year. We saw a significant improvement in our working capital. We will continue to focus on disciplined inventory management and other working capital components. In terms of liquidity, we ended the quarter with 63.3 million comprised of 6 million in cash and 57.3 million of availability under our revolving credit facility the decrease of 54.9 million of liquidity compared to the end of 2023 primarily due to reduction in the borrowing base partially resulting from lower inventory as of march 31st 2024 There was $89 million outstanding under the revolving credit facility compared to $47 million from the comparable prior year period and $66 million at the end of 2023. As noted in our Form 10-Q filing this morning, we are pursuing potential sale leaseback of approximately 1 million square foot Sandston, Virginia Distribution Center, which is a highly desirable location. This action, along with our Dallas Distribution Center, positions us to execute our long-term supply chain network strategy by optimizing our distribution footprint and will provide additional liquidity for the company. In addition, as Charles mentioned, we've also retained Houlihan Loki to evaluate financing alternatives. Moving on to our store network, We have 435 stores in our portfolio, and we do not plan to have net store growth in 2024. We are constantly looking for ways to optimize our store network. Looking ahead, we expect to continue to navigate a challenging macroeconomic environment through the remainder of the year. We are not providing specific earnings guidance. Let me provide some additional color on our perspective for the year. The company expects full-year revenues to continue to be challenged primarily due to the macro uncertainty. Despite these cyclical factors, we remain focused on executing against our strategic initiatives. Turning the gross margin, we expect to continue to benefit from lower transportation costs partially offset by higher vinyl sourcing costs and some reinvestment into pricing. In regard to inventory, we remain focused on disciplined inventory management and will continue to manage our inventory to the run rate of sales. We will look to identify further efficiencies through execution of our working capital initiatives. Lastly, We will continue to prudently manage expenses and focus on aligning our cost structure with our current rate of sales. In terms of capital expenditures, we're lowering our spend to approximately $13 million in 2024, primarily to support our strategic investments, including our carpet rollout. With that, I'll turn the call back to Charles. Thank you.
spk03: If you would like to ask a question, please do press star followed by 1 on your telephone keypad. We will now begin the question and answer session. Today's question comes from Laura Champagne from Loop Capital. Please go ahead. Your line is now open.
spk04: Thank you for taking my question. It's on the SG&A expense line. I know that a few months ago you were expecting to grow that this year. How much can you reasonably pull it back? in terms of either dollars or percentage spent year on year?
spk02: Yeah, Laura, thanks for that question. You know, this quarter, we reduced SG&A expenses by over $2 million net versus the same period last year and had another sequential reduction as you compare SG&A spend against Q4. Also, in the quarter, we realized just under $5 million of savings from a number of our different activities and initiatives, and we feel like we've got an additional runway, probably a very similar rate of reduction that I just communicated that we achieved in the quarter.
spk04: Okay, so at that rate, It's tough for me to get to a profitability level, certainly on the sales pace. What sales level do you think LL Flooring needs to be profitable?
spk02: Yeah, I believe anywhere between $930 million and $1 billion with our infrastructure rate as it exists today. But as I mentioned, we've got additional activities and initiatives that we've not only completed a number of in Q1, that drove that $5 million of savings, but it will continue for Q2, three and four at a somewhat similar reduction rate.
spk01: Yeah. And let me add Laura too. I think, you know, Laura, while we're talking about, you know, the X seller environment, we really do have a low share, which gives us a good opportunity to grow our top line sales. Obviously we got our carpet initiative, which will be in over 200 stores by the end of, Q2, we continue to be pleased with the performance in CRM in terms of pro-relationship building and what we're beginning to see in those opportunities. So while we're very focused on the cost side of our business, we see plenty of opportunities even in a softer market to us to expand our business, whether it's the successes we're seeing with Bellawood and our wood business, our category expansions, our new product category expansions, or new channels like our national account. So we're attacking our business very aggressively, both on our cost side, but just as equally on the sales side.
spk04: Got it. Thank you.
spk03: Thank you, Laura. Thank you. This will conclude today's question and answer session, so I'd like to pass it back over to Charles Tyson for any closing remarks.
spk01: Thank you, Operator. Thank you for joining our Q1 2024 earnings call today. Again, I want to thank all of our team members for their hard work, delighting our customers during the quarter, and we look forward to talking to you next quarter. Thank you.
spk03: This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.
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