UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
(Zip Code) |
(
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
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Trading Symbol: |
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Name of exchange on which registered: |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act:
☐ Large accelerated filer |
☒ |
☐ Non-accelerated filer |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ☐ Yes
As of August 4, 2023, there are
LL FLOORING HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10‑Q
FOR THE QUARTER ENDED JUNE 30, 2023
TABLE OF CONTENTS
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
LL Flooring Holdings, Inc.
Consolidated Balance Sheets (Unaudited)
In Thousands
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June 30, |
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December 31, |
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2023 |
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2022 |
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Assets |
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Current Assets: |
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Cash and Cash Equivalents |
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$ |
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$ |
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Merchandise Inventories |
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Prepaid Expenses |
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Other Current Assets |
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Total Current Assets |
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Property and Equipment, net |
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Operating Lease Right-of-Use Assets |
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Net Deferred Tax Assets |
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— |
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Other Assets |
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Total Assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current Liabilities: |
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Accounts Payable |
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$ |
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$ |
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Customer Deposits and Store Credits |
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Accrued Compensation |
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Sales and Income Tax Liabilities |
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Accrual for Legal Matters and Settlements |
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Operating Lease Liabilities - Current |
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Other Current Liabilities |
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Total Current Liabilities |
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Other Long-Term Liabilities |
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Operating Lease Liabilities - Long-Term |
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Credit Agreement |
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Total Liabilities |
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Stockholders’ Equity: |
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Common Stock ($ |
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Treasury Stock, at cost ( |
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Additional Capital |
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Retained Earnings |
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Total Stockholders’ Equity |
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Total Liabilities and Stockholders’ Equity |
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$ |
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$ |
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See accompanying notes to consolidated financial statements
2
LL Flooring Holdings, Inc.
Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)
In Thousands, Except Per Share Data
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Net Sales |
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Net Merchandise Sales |
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$ |
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$ |
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$ |
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$ |
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Net Services Sales |
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Total Net Sales |
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Cost of Sales |
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Cost of Merchandise Sold |
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Cost of Services Sold |
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Total Cost of Sales |
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Gross Profit |
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Selling, General and Administrative Expenses |
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Operating (Loss) Income |
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( |
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Other Expense |
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(Loss) Income Before Income Taxes |
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( |
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Income Tax Expense |
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Net (Loss) Income and Comprehensive (Loss) Income |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Net (Loss) Income per Common Share—Basic |
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$ |
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$ |
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$ |
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$ |
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Net (Loss) Income per Common Share—Diluted |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Weighted Average Common Shares Outstanding: |
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Basic |
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Diluted |
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See accompanying notes to consolidated financial statements
3
LL Flooring Holdings, Inc.
Consolidated Statements of Stockholders’ Equity (Unaudited)
In Thousands
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Total |
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Common Stock |
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Treasury Stock |
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Additional |
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Retained |
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Stockholders’ |
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Shares |
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Par Value |
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Shares |
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Value |
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Capital |
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Earnings |
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Equity |
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March 31, 2022 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Stock-Based Compensation Expense |
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— |
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— |
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— |
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— |
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— |
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Exercise of Stock Options |
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— |
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— |
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— |
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— |
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Release of Restricted Shares |
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— |
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— |
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— |
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— |
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— |
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— |
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Common Stock Repurchased |
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( |
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— |
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( |
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— |
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— |
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( |
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Net Income |
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— |
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— |
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— |
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— |
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— |
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June 30, 2022 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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March 31, 2023 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Stock-Based Compensation Expense |
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— |
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— |
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— |
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— |
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— |
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Release of Restricted Shares |
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— |
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— |
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— |
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— |
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— |
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— |
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Common Stock Repurchased |
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— |
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— |
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( |
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— |
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— |
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( |
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Net Loss |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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June 30, 2023 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Total |
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Common Stock |
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Treasury Stock |
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Additional |
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Retained |
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Stockholders’ |
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Shares |
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Par Value |
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Shares |
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Value |
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Capital |
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Earnings |
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Equity |
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December 31, 2021 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Stock-Based Compensation Expense |
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— |
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— |
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— |
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— |
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— |
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Exercise of Stock Options |
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— |
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— |
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— |
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— |
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Release of Restricted Shares |
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— |
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— |
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— |
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— |
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— |
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— |
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Common Stock Repurchased |
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( |
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— |
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( |
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— |
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— |
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( |
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Net Income |
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— |
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— |
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— |
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— |
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— |
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June 30, 2022 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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December 31, 2022 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Stock-Based Compensation Expense |
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— |
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— |
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— |
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— |
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— |
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Release of Restricted Shares |
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— |
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— |
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— |
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— |
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— |
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— |
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Common Stock Repurchased |
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— |
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— |
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( |
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— |
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— |
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( |
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Net Loss |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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June 30, 2023 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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See accompanying notes to consolidated financial statements
4
LL Flooring Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
In Thousands
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Six Months Ended June 30, |
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2023 |
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2022 |
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Cash Flows from Operating Activities: |
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Net (Loss) Income |
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$ |
( |
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$ |
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Adjustments to Reconcile Net (Loss) Income: |
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Depreciation and Amortization |
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Deferred Income Taxes Provision (Benefit) |
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( |
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Income on Vouchers Redeemed for Legal Settlements |
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( |
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( |
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Stock-Based Compensation Expense |
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Provision for Inventory Obsolescence Reserves |
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Loss (Gain) on Disposal of Fixed Assets |
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( |
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Changes in Operating Assets and Liabilities: |
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Merchandise Inventories |
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( |
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Accounts Payable |
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Customer Deposits and Store Credits |
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( |
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( |
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Prepaid Expenses and Other Current Assets |
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( |
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( |
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Accrued Compensation |
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( |
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( |
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Advertising Accrual |
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Accrual for Legal Matters and Settlements |
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Payments for Legal Matters and Settlements |
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( |
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( |
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Other Assets and Liabilities |
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( |
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Net Cash Provided by (Used in) Operating Activities |
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( |
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Cash Flows from Investing Activities: |
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Purchases of Property and Equipment |
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( |
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( |
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Other Investing Activities |
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— |
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Net Cash Used in Investing Activities |
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( |
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( |
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Cash Flows from Financing Activities: |
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Borrowings on Credit Agreement |
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Payments on Credit Agreement |
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( |
) |
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( |
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Common Stock Repurchased |
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( |
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( |
) |
Other Financing Activities |
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— |
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Net Cash (Used in) Provided by Financing Activities |
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( |
) |
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Net Decrease in Cash and Cash Equivalents |
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( |
) |
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( |
) |
Cash and Cash Equivalents, Beginning of Period |
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Cash and Cash Equivalents, End of Period |
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$ |
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$ |
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Supplemental Disclosure of Non-Cash Operating and Financing Activities: |
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Relief of Inventory for Vouchers Redeemed for Legal Settlements |
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$ |
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$ |
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Tenant Improvement Allowance for Leases |
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( |
) |
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( |
) |
See accompanying notes to consolidated financial statements
5
LL Flooring Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
LL Flooring Holdings, Inc., formerly Lumber Liquidators Holdings, Inc., and its direct and indirect subsidiaries (collectively and, where applicable, individually, “LL Flooring” or the “Company”) engage in business as a multi-channel specialty retailer of hard-surface flooring, and hard-surface flooring enhancements and accessories, operating as a single operating segment. The Company offers an extensive assortment of hard-surface flooring including waterproof hybrid resilient, waterproof vinyl plank, solid and engineered hardwood, laminate, bamboo, tile, and cork, with a wide range of flooring enhancements and accessories to complement. The Company also provides in-home delivery and installation services to its customers. The Company primarily sells to consumers or to Pros on behalf of consumers through a network of store locations in metropolitan areas. As of June 30, 2023, the Company’s
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10‑Q for interim financial reporting pursuant to the rules and regulations of the SEC. In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. However, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report filed on Form 10‑K for the year ended December 31, 2022.
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Note 2. Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and other liabilities approximate fair value because of the short-term nature of these items. The carrying value of the Revolving Credit Facility approximates fair value due to the variable rate of interest.
Merchandise Inventories
The Company values merchandise inventories at the lower of cost or net realizable value. The method by which amounts are removed from inventory is weighted average cost. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and in immediate saleable form. The Company relies on a select group of international and domestic suppliers to provide imported flooring products that meet the Company’s specifications. The Company is subject to risks associated with obtaining products from abroad, including disruptions or delays in production, shipments, supply chain, delivery or processing, including due to trade restrictions. Also included in merchandise inventories are tariff-related costs.
6
Recognition of Net Sales
The Company generates revenues primarily by retailing merchandise in the form of hard-surface flooring and accessories. Additionally, the Company expands its revenues by offering services to deliver and/or install this merchandise for its customers; it considers these services to be separate performance obligations. The separate performance obligations are detailed on the customer’s invoice(s) and the customer often purchases flooring merchandise without purchasing installation or delivery services. Sales occur through the Company’s network of
Revenue is based on consideration specified in a contract with a customer and excludes any sales incentives from vendors. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer or performing services for a customer. Revenues from installation and freight services are recognized when the delivery is made or the installation is complete, which approximates the recognition of revenue over time due to the short duration of service provided. The price of the Company’s merchandise and services is specified in the respective contract and detailed on the invoice agreed to with the customer including any discounts. The Company generally requires customers to pay a deposit, equal to approximately half of the retail sales value, when ordering merchandise not regularly carried in a given location or not currently in stock. In addition, the Company generally does not extend credit to its customers with payment due in full at the time the customer takes possession of merchandise or when the service is provided. Customer payments and deposits received in advance of the customer taking possession of the merchandise or receiving the services are recorded as deferred revenues in the accompanying consolidated balance sheet caption “Customer Deposits and Store Credits.”
The following table shows the activity in this account for the periods noted:
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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(in thousands) |
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Customer Deposits and Store Credits, Beginning Balance |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
New Deposits |
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( |
) |
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( |
) |
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( |
) |
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( |
) |
Recognition of Revenue |
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Sales Tax included in Customer Deposits |
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Other |
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Customer Deposits and Store Credits, Ending Balance |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days, subject to the discretion of the store manager. The amount of revenue recognized for flooring merchandise is adjusted for expected returns, which are estimated based on the Company’s historical data, current sales levels, and forecasted economic trends. The Company uses the expected value method to estimate returns because it has a large number of contracts with similar characteristics. The Company reduces revenue by the number of expected returns and records it within “Other Current Liabilities” on the consolidated balance sheet. The sales return reserve was $
7
In total, the Company offers hundreds of different flooring products; however, no single flooring product represented a significant portion of its sales mix. By major product category, the Company’s sales mix was as follows:
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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(in thousands, except percentage data) |
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Manufactured Products1 |
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$ |
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% |
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$ |
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% |
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$ |
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% |
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$ |
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% |
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Solid and Engineered Hardwood |
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% |
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% |
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% |
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% |
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Moldings and Accessories and Other |
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% |
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% |
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% |
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% |
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Installation and Delivery Services |
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% |
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% |
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% |
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% |
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Total |
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$ |
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% |
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$ |
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% |
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$ |
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% |
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$ |
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% |
1 Includes engineered vinyl plank, laminate, vinyl and tile.
Cost of Sales
Cost of sales includes the cost of products sold, including tariffs, the cost of installation services, and transportation costs from vendors to the Company’s distribution centers or store locations. It also includes transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including obsolescence and shrinkage, and costs to produce and ship samples, which are net of vendor allowances. For the three and six months ended June 30, 2023, cost of sales also included $
The Company offers a range of limited warranties for the durability of the finish on its prefinished products to its services provided. These limited warranties range from to
Vendor allowances mostly consist of volume rebates and are accrued as earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based on estimates of purchases. Volume rebates earned are initially recorded as a reduction in merchandise inventories and a subsequent reduction in cost of sales when the related product is sold. Reimbursement received for the cost of producing samples is recorded as an offset against cost of sales.
Note 3. Stockholders’ Equity
Net (Loss) Income per Common Share
The following table sets forth the computation of basic and diluted net (loss) income per common share:
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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(in thousands, except per share data) |
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Net (Loss) Income |
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$ |
( |
) |
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$ |
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$ |
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) |
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$ |
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Weighted Average Common Shares Outstanding—Basic |
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Effect of Dilutive Securities: |
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Common Stock Equivalents |
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— |
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— |
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Weighted Average Common Shares Outstanding—Diluted |
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Net (Loss) Income per Common Share—Basic |
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$ |
( |
) |
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$ |
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$ |
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) |
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$ |
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Net (Loss) Income per Common Share—Diluted |
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$ |
( |
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$ |
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$ |
( |
) |
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$ |
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8
The following shares have been excluded from the computation of Weighted Average Common Shares Outstanding—Diluted because the effect would be anti-dilutive:
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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(in thousands) |
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Stock Options |
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Restricted Shares |
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Stock Repurchase Program
In February 2012, the Company’s board of directors adopted an authorization for the repurchase of up to a total of $
The timing and amount of any share repurchases under the authorization will be determined at the Company's discretion and based on market conditions and other considerations. Share repurchases under the authorizations may be made through open market purchases or pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. The program does not obligate LL Flooring to acquire any particular amount of its common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.
Outside of the share repurchase program, the Company repurchased $
Note 4. Stock-based Compensation
The following table summarizes share activity related to employee stock options and restricted stock awards (“RSAs”):
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Stock Options |
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Restricted Stock Awards |
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(in thousands) |
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Options Outstanding/Nonvested RSAs, December 31, 2022 |
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Granted |
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— |
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Options Exercised/RSAs Released |
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— |
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( |
) |
Forfeited |
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( |
) |
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( |
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Options Outstanding/Nonvested RSAs, June 30, 2023 |
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The Company granted a target of
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Under the Company’s equity incentive plan, the Company’s non-employee directors are compensated with an annual RSA grant. The amount of outstanding nonvested RSAs granted to non-employee directors was
Note 5. Credit Agreement
On December 27, 2022, the Company entered into a Waiver and Third Amendment to the Credit Agreement (the “Amendment”) with Bank of America, N.A. ("the "Bank") and Wells Fargo Bank, National Association ("Wells" and, collectively with the Bank, the "Lenders") and the Bank in its capacity as administrative agent and collateral agent (in this capacity, the “Agent”) and Wells as syndication agent. The Amendment, among other things, (i) changed the rate under the Credit Agreement for borrowings from a LIBOR-based rate to a Term SOFR-based rate (as defined in the Amendment), subject to certain adjustments specified in the Amendment and (ii) provided a waiver of a technical event of default under the Credit Agreement related to providing notice to the Lenders of the Company’s name change from Lumber Liquidators Holdings, Inc. to LL Flooring Holdings, Inc. Except as set forth in the Amendment, all other terms and conditions of the Credit Agreement remain in place.
The Credit Agreement contains a Revolving Credit Facility of up to $
The Revolving Credit Facility is secured by security interests in the Collateral (as defined in the Credit Agreement), which includes substantially all assets of the Company including, among other things, the Company’s inventory and credit card receivables, and the Company’s East Coast distribution center located in Sandston, Virginia. Under the terms of the Credit Agreement, the Company has the ability to release the East Coast distribution center from the Collateral under certain conditions.
The Amendment defines the margin for Term SOFR Rate Loans (as defined in the Amendment) as a range of
The Credit Agreement contains a fixed charge coverage ratio covenant that becomes effective only when specified availability under the Revolving Credit Facility falls below the greater of $
Note 6. Taxes
The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision and is adjusted for discrete items that occur within the period.
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For the three months ended June 30, 2023, the Company recognized an income tax expense of $
For the six months ended June 30, 2023, the Company recognized an income tax expense of $
As of June 30, 2023, a full valuation allowance of $
In February 2022, the Company received sales tax and use tax assessments from the Commonwealth of Virginia covering part of 2014 through 2017. The Company believes there are factual errors, is disputing this assessment, and will defend itself vigorously in this matter. The Company is pursuing an administrative appeal, which was filed on April 15, 2022. Given the uncertainty of the final resolution, the Company cannot reasonably estimate the loss or range of loss, if any, that may result from this action and therefore no specific accrual has been made related to this. Any losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.
Note 7. Commitments and Contingencies
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December 31, 2022 |
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June 30, 2023 |
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Litigation Matter |
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Accrual for Legal Matters |
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Settlement |
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Vouchers |
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Accrual for Legal Matters |
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Description |
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and Settlements - Current |
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Accruals |
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Payments |
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Redeemed |
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and Settlements - Current |
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MDL |
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$ |
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$ |
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$ |
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$ |
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$ |
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1 |
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Gold |
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— |
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— |
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1 |
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Other Matters |
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December 31, 2021 |
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June 30, 2022 |
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Litigation Matter |
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Accrual for Legal Matters |
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Settlement |
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Vouchers |
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Accrual for Legal Matters |
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Description |
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and Settlements - Current |
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Accruals |
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Payments |
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Redeemed |
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and Settlements - Current |
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MDL |
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$ |
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$ |
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$ |
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$ |
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$ |
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Gold |
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— |
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— |
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Mason |
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— |
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— |
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Other Matters |
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11
Litigation Related to Formaldehyde-Abrasion MDLs
In 2018, the Company entered into a settlement agreement to resolve claims related to Chinese-manufactured laminate products (the “Formaldehyde-Abrasion MDL”). Under the terms of the settlement agreement, the Company funded $
As of June 30, 2023, the remaining accrual related to these matters was $
Litigation Relating to Bamboo Flooring
In 2019, the Company finalized a settlement agreement to resolve claims related to Morning Star bamboo flooring (the “Gold Litigation”). Under the terms of the settlement agreement, the Company contributed $
As of June 30, 2023, the remaining accrual related to these matters was $
Mason Lawsuit
In the second quarter of 2022, the Company paid $
Antidumping and Countervailing Duties Investigation
In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring (“Petitioners”) filed a petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to companies importing multilayered wood flooring from Chinese suppliers subject to the AD and CVD orders. The Company’s multilayered wood flooring imports from China accounted for approximately
As part of its processes in these proceedings, the DOC conducts annual reviews of the AD and CVD rates. In such cases, the DOC will issue preliminary rates that are not binding and are subject to comment by interested parties. After consideration of the comments received, the DOC will issue final rates for the applicable period, which may lag by a year or more. At the time of import, the Company makes deposits at the then prevailing rate, even while the annual review is in process. When rates are declared final by the DOC, the Company accrues a receivable or payable depending on where that final rate compares to the deposits it has made. The Company and/or the domestic manufacturers can appeal the final rate for any period and can place a hold on final settlement by U.S. Customs and Border Protection while the appeals are pending.
The Company as well as other involved parties have appealed many of the final rate determinations. Certain of those appeals are pending and, at times, have resulted in delays in settling the shortfalls and refunds. Because of the length of time for finalization of
12
rates as well as appeals, any subsequent adjustment of AD and CVD rates typically flows through a period different from those in which the inventory was originally purchased and/or sold.
As of June 30, 2023, the outstanding AD and CVD principal balances were $
The Company recorded net interest expense related to antidumping and countervailing duties of $
Section 301 Tariffs
Since September 2018, pursuant to Section 301 of the Trade Act of 1974, the United States Trade Representative (“USTR”) has imposed tariffs on certain goods imported from China over four tranches ("Lists"). Products imported by the Company fall within Lists 3 and 4a for which tariffs range from 10% to 25%. On September 10, 2020 several importers of vinyl flooring ("the plaintiffs") filed a lawsuit with the Court of International Trade ("CIT") challenging the Section 301 tariffs under Lists 3 and 4a and the USTR's actions. The plaintiffs argued that the USTR had not acted within its statutory authority when it modified the original Section 301 determinations on certain goods from China by adding Lists 3 and 4a and that the agency had not demonstrated that it satisfied the procedural requirements of the Administrative Procedure Act. On March 17, 2023, the CIT issued a decision sustaining the List 3 and 4a tariffs. The CIT’s decision was appealed by the plaintiffs to the Court of Appeals for the Federal Circuit ("CAFC") on May 13, 2023. If these appeals are successful, the Company may qualify for refunds on these Section 301 tariffs. At this time, the Company is unable to predict the timing or outcome of the ruling by the CAFC.
Other Matters
The Company is also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while the outcome of any such claims and disputes cannot be predicted with certainty, its ultimate liability in connection with these matters is not expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.
Note 8. Related Party Transactions
During the second quarter of 2023, F9 Investments, LLC, filed a Schedule 13D (and two subsequent amendments) with the SEC indicating beneficial ownership of more than
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
This report includes statements of the Company’s expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995. These statements, which may be identified by words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” "assumes," “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “could,” “projects,” "targets," “potential,” "will likely result," and other similar terms and phrases, are based on the beliefs of the Company’s management, as well as assumptions made by, and information currently available to, the Company’s management as of the date of such statements. These statements are subject to risks and uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control. These risks include, without limitation, the impact of any of the following:
14
Information regarding risks and uncertainties is contained in the Company’s reports filed with the SEC, including the Item 1A, “Risk Factors,” section of this quarterly report and the Form 10‑K for the year ended December 31, 2022.
This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. “Financial Statements” of this quarterly report and the audited financial statements and notes and management discussion included in the Company’s annual report filed on Form 10‑K for the year ended December 31, 2022.
Overview
LL Flooring is one of the leading specialty retailers of hard-surface flooring in the U.S. with 442 stores as of June 30, 2023. Our Company seeks to offer the best customer experience online and in stores, with more than 500 varieties of hard-surface floors featuring a range of quality styles and on-trend designs. Our online tools also help empower customers to find the right solution for the space they’ve envisioned. Our extensive selection includes waterproof hybrid resilient, waterproof vinyl plank, solid and engineered hardwood, laminate, bamboo, tile, and cork, with a wide range of flooring enhancements and accessories to complement. Our stores are staffed with flooring experts who provide advice, Pro partnership services and installation options for all our products, the majority of which are in stock and ready for delivery. Our vision is to be the customers’ first choice in hard-surface flooring by providing the best experience, from start to finish. We offer the accessible flooring expertise and high-touch service of a local store, combined with the value, omnichannel convenience and product availability of a national brand. We plan to leverage this advantage to differentiate ourselves in the highly fragmented flooring market.
To supplement the financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses the following non-GAAP financial measures: (i) Adjusted Gross Profit; (ii) Adjusted Gross Margin; (iii) Adjusted SG&A; (iv) Adjusted SG&A as a Percentage of Net Sales; (v) Adjusted Operating (Loss) Income; (vi) Adjusted Operating Margin; (vii) Adjusted Other Expense; (viii) Adjusted Other Expense as a Percentage of Net Sales; (ix) Adjusted (Loss) Earnings; and (x) Adjusted (Loss) Earnings per Diluted Share. These non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with GAAP. These supplemental measures may vary from, and may not be comparable to, similarly titled measures by other companies.
The non-GAAP financial measures are presented because we believe the non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends related to our financial condition and results of operations. These measures provide an additional tool for investors to use in evaluating our ongoing operating performance, and management, in certain cases, uses them to determine incentive compensation. The presented non-GAAP financial measures exclude items that management does not believe reflect our core operating performance, which include incremental costs of sales and associated legal costs related to disruptions to supply chain and other trade regulations and changes in antidumping and countervailing duties, as such items are outside of our control or due to their inherent unusual, non-operating, unpredictable, non-recurring, or
15
non-cash nature. Reconciliations of these non-GAAP financial measures are provided on the pages that follow (certain numbers may not sum due to rounding).
Executive Summary
The Company’s second quarter performance primarily reflected the continued impact of the difficult macro backdrop that has impacted big ticket discretionary purchases as well as the demand for home remodeling projects. We also continued to experience pressure from low brand awareness as we continue on our transition to LL Flooring.
While the Company’s near-term results have been challenged, 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 focus on our five strategic initiatives that will improve sales productivity and profitability. We have fortified our executive leadership team with new leaders that bring a wealth of financial, retail, brand building, and consultative selling experience and ideas to drive these initiatives, focusing on implementing our CRM platform to drive Pro sales, improving store execution to remove friction and enhance the customer experience, increasing our brand awareness, executing on our carpet initiative which provides a meaningful expansion of our addressable market and aligning our cost structure to our run-rate of revenues.
While we expect the challenging macro environment to persist and cannot predict the timing of a recovery, sales visibility remains limited. As a result, we will focus to operate the business with discipline from an expense and capital management standpoint, including further leveraging our inventory management practices to yield continued improvements in our overall working capital.
We are actively pursuing operational opportunities to improve our performance including broadening and growing our brand awareness among consumers to drive traffic; ensuring a consistent customer experience across our omnichannel network to improve conversion; and improving operating efficiencies by intently working to reduce costs while focusing investments on our top growth priorities.
Vinyl Update
In February 2023, U.S. Customs and Border Protection (“CBP”) added aluminum and polyvinyl chloride ("PVC") to a list of categories including cotton, tomatoes and polysilicon for which CBP has the ability to request additional documentation from importers under the Uyghur Forced Labor Prevention Act ("UFLPA"). During the first quarter, CBP began to request additional documentation with respect to the UFLPA for some shipments of vinyl flooring originating from Asia.
We require our vendors to follow our strict guidelines on responsible sourcing, obtain periodic certifications from them concerning compliance with these standards, and perform audit procedures of their supply chain documentation.
During the second quarter of 2023, we incurred $2.9 million of incremental expenses related to the UFLPA, which included demurrage, storage, transportation, and legal expenses. For the six months ended June 30, 2023, incremental expenses related to the UFLPA were $5.3 million.
We determined in the second quarter of 2023 that it would be most cost effective to return the majority of the product that had been detained by CBP to the affected vendor. We expect the return to vendor will be completed in the third quarter.
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. We introduced a number of new products in the vinyl category late in the second quarter and a larger number of new vinyl products will become available in the third quarter.
Despite our compliance program and mitigation efforts, we continue to see a small number of shipments from additional vinyl vendors being impacted by UFLPA holds, and these interruptions may cause more significant impact to sales and margins through the year. We are unable to predict whether other vinyl flooring shipments will be impacted in the future and, whether this issue could have further material impacts on sales and margins as we progress throughout the year. See “Risk Factor – The Company and third-party suppliers on whom we rely source a significant portion of the merchandise we sell from Asia, which exposes us to the risk of supply chain disruptions" in the Company’s annual report filed on Form 10‑K for the year ended December 31, 2022.
16
Results of Operations
We believe the selected sales data, the percentage relationship between net sales and major categories in the consolidated statements of operations and the percentage change in the dollar amounts of each of the items presented below are important in evaluating the performance of our business operations.
|
|
|
|
|
|
|
|
% (Decrease) |
|
|||
|
|
% of Net Sales |
|
|
in Dollar |
|
||||||
|
|
Three Months Ended June 30, |
|
|
2023 |
|
||||||
|
|
2023 |
|
|
2022 |
|
|
vs. 2022 |
|
|||
Net Sales |
|
|
|
|
|
|
|
|
|
|||
Net Merchandise Sales |
|
|
85.5 |
% |
|
|
86.2 |
% |
|
|
(21.5 |
)% |
Net Services Sales |
|
|
14.5 |
% |
|
|
13.8 |
% |
|
|
(17.3 |
)% |
Total Net Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(20.9 |
)% |
Gross Profit |
|
|
35.8 |
% |
|
|
35.7 |
% |
|
|
(20.8 |
)% |
Selling, General and Administrative Expenses |
|
|
44.4 |
% |
|
|
34.1 |
% |
|
|
2.9 |
% |
Operating (Loss) Income |
|
|
(8.7 |
)% |
|
|
1.6 |
% |
|
|
(539.0 |
)% |
Other Expense |
|
|
0.3 |
% |
|
|
0.1 |
% |
|
|
239.2 |
% |
(Loss) Income Before Income Taxes |
|
|
(8.9 |
)% |
|
|
1.5 |
% |
|
|
(573.7 |
)% |
Income Tax Expense |
|
|
7.6 |
% |
|
|
0.6 |
% |
|
|
933.4 |
% |
Net (Loss) Income and Comprehensive (Loss) Income |
|
|
(16.5 |
)% |
|
|
0.9 |
% |
|
|
(1525.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
% (Decrease) |
|
|||
|
|
% of Net Sales |
|
|
in Dollar |
|
||||||
|
|
Six Months Ended June 30, |
|
|
2023 |
|
||||||
|
|
2023 |
|
|
2022 |
|
|
vs. 2022 |
|
|||
Net Sales |
|
|
|
|
|
|
|
|
|
|||
Net Merchandise Sales |
|
|
86.5 |
% |
|
|
86.8 |
% |
|
|
(17.8 |
)% |
Net Services Sales |
|
|
13.5 |
% |
|
|
13.2 |
% |
|
|
(15.4 |
)% |
Total Net Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(17.5 |
)% |
Gross Profit |
|
|
36.2 |
% |
|
|
36.5 |
% |
|
|
(18.2 |
)% |
Selling, General and Administrative Expenses |
|
|
43.2 |
% |
|
|
34.8 |
% |
|
|
2.5 |
% |
Operating (Loss) Income |
|
|
(7.1 |
)% |
|
|
1.7 |
% |
|
|
(446.3 |
)% |
Other Expense |
|
|
0.4 |
% |
|
|
— |
% |
|
|
896.7 |
% |
(Loss) Income Before Income Taxes |
|
|
(7.4 |
)% |
|
|
1.6 |
% |
|
|
(472.3 |
)% |
Income Tax Expense |
|
|
3.0 |
% |
|
|
0.5 |
% |
|
|
410.8 |
% |
Net (Loss) Income and Comprehensive (Loss) Income |
|
|
(10.4 |
)% |
|
|
1.2 |
% |
|
|
(832.1 |
)% |
17
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
SELECTED SALES DATA |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Average Sale1 |
|
$ |
1,855 |
|
|
$ |
1,860 |
|
|
$ |
1,810 |
|
|
$ |
1,777 |
|
Comparable Store Net Sales Decrease2 |
|
|
(22.2 |
)% |
|
|
(3.1 |
)% |
|
|
(19.1 |
)% |
|
|
(3.3 |
)% |
Transaction Count Decrease3 |
|
|
(21.9 |
)% |
|
|
(22.0 |
)% |
|
|
(21.0 |
)% |
|
|
(16.7 |
)% |
Average Retail Price per Unit Sold Increase4 |
|
|
3.6 |
% |
|
|
14.7 |
% |
|
|
6.1 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Number of Stores Open, end of period |
|
|
442 |
|
|
|
437 |
|
|
|
442 |
|
|
|
437 |
|
Number of Stores Opened in Period, net of closures |
|
|
(1 |
) |
|
|
6 |
|
|
|
— |
|
|
|
13 |
|
Number of Stores Relocated in Period5 |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Net Sales
Second quarter 2023 net sales of $236.4 million decreased $62.5 million, or 20.9%, versus the second quarter of 2022, driven by a decrease in transaction count reflecting by lower spending by consumers and Pros. Total comparable store sales for the quarter decreased 22.2% versus the second quarter of 2022. Net merchandise sales and net service sales decreased 21.5% and 17.3%, respectively. During the second quarter, the Company closed one store, bringing total stores to 442 as of June 30, 2023.
For the quarter, average ticket decreased 0.3%, and transaction count decreased 21.9%, reflecting continued pressures from macroeconomic uncertainty coupled with operational challenges. Average retail price per unit sold increased 3.6% quarter over quarter, primarily due to the Company's pricing and promotion strategies to offset higher material and transportation costs as well as favorable product mix. As the Company continues to navigate uncertainty in the macroeconomic environment, it will continue to monitor the competitive pricing environment to inform its pricing and promotion strategies.
Net sales for the six months ended June 30, 2023 of $477.1 million decreased $100.9 million, or 17.5%, compared to the first half of last year. Total comparable store sales for first half of 2023 decreased 19.1% versus the first half of last year.
For the first half of 2023, transaction count decreased 21.0% from the comparable period in prior year, reflecting the same drivers as the quarter. Average ticket increased 1.9%, and average retail price per unit sold increased 6.1%, driven by the Company's aforementioned navigation of price elasticities in the inflationary macroeconomic environment.
Gross Profit
Gross profit decreased 20.8% in the second quarter of 2023 to $84.5 million from $106.8 million in the comparable period in 2022, and gross margin of 35.8% increased 10 basis points compared to the second quarter last year. Included in gross profit was $2.4 million in incremental costs related to U.S. Customs detentions of flooring products that contain PVC as a consequence of the UFLPA. Gross profit for the second quarter of 2022 was impacted by the $1.2 million net antidumping and countervailing duty rate changes. Excluding these 2023 and 2022 unusual items, adjusted gross profit (a non-GAAP measure) of $86.9 million decreased $21.1 million and adjusted gross margin (a non-GAAP measure) of 36.7% increased 60 basis points compared to the same period last year. The decreases in both gross profit and adjusted gross profit is driven by a decrease in transaction count reflecting lower spending by consumers and Pros, while the increase in gross margin and adjusted gross margin reflects the Company's ability to offset higher material and transportation costs (collectively up more than 400 basis points) through pricing, promotion and alternative country/vendor sourcing strategies.
Gross profit for the six months ended June 30, 2023 of $172.5 million decreased $38.3 million compared to the first half of 2022, and gross margin of 36.2% decreased 30 basis points compared to the same period last year. Included in gross profit was $4.5
18
million in incremental costs related to U.S. Customs detentions on flooring products that contain PVC as a consequence of the UFLPA. Gross profit for the first half of 2022 was impacted by the $1.0 million net antidumping and countervailing duty rate changes. Excluding these 2023 and 2022 items, adjusted gross profit (a non-GAAP measure) of $177.0 million decreased $34.8 million and adjusted gross margin (a non-GAAP measure) of 37.1% increased 40 basis points compared to the same period last year. The decreases in both gross profit and adjusted gross profit are driven by lower spending by consumers and Pros, while the increase in gross margin and adjusted gross margin reflects the Company's ability to offset higher material and transportation costs (collectively up more than 300 basis points) through pricing, promotion and alternative country/vendor sourcing strategies.
Additionally, the Company’s financial statements have been impacted by Section 301 tariffs on certain products imported from China in recent years. The tariffs flow through the income statement as the product is sold. The Company has deployed strategies to mitigate tariffs and improve gross margin, primarily through adjusting its pricing and promotion strategies and alternative country sourcing. The Company's merchandise receipts subject to Section 301 tariffs were 15% and 12% during the second quarter of 2023 and 2022, respectively. Although there was an increase in percentage, total purchases subject to Section 301 tariffs decreased as the Company reduced total inventory purchases in the current year and is continuing to leverage our sourcing capabilities to find alternative sourcing geographies.
As discussed in Item 1, Note 7 to the consolidated financial statements, the Company is unable to predict the timing or outcome of the ruling by the CAFC. If these appeals are successful, the Company may qualify for refunds on these Section 301 tariffs.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||||
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
||||||||
|
|
(in thousands, except percentage data) |
|
|||||||||||||||||||||||||||||
Gross Profit/Margin, as reported (GAAP) |
|
$ |
84,531 |
|
|
|
35.8 |
% |
|
$ |
106,750 |
|
|
|
35.7 |
% |
|
$ |
172,531 |
|
|
|
36.2 |
% |
|
$ |
210,829 |
|
|
|
36.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Vinyl Charges1 |
|
|
2,352 |
|
|
|
1.0 |
% |
|
|
— |
|
|
|
— |
% |
|
|
4,489 |
|
|
|
0.9 |
% |
|
|
— |
|
|
|
— |
% |
Antidumping and Countervailing Adjustments2 |
|
|
— |
|
|
|
— |
% |
|
|
1,218 |
|
|
|
0.4 |
% |
|
|
— |
|
|
|
— |
% |
|
|
977 |
|
|
|
0.2 |
% |
Adjustment Items Subtotal |
|
|
2,352 |
|
|
|
1.0 |
% |
|
|
1,218 |
|
|
|
0.4 |
% |
|
|
4,489 |
|
|
|
0.9 |
% |
|
|
977 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Adjusted Gross Profit/Margin (non-GAAP measures) |
|
$ |
86,883 |
|
|
|
36.7 |
% |
|
$ |
107,968 |
|
|
|
36.1 |
% |
|
$ |
177,020 |
|
|
|
37.1 |
% |
|
$ |
211,806 |
|
|
|
36.7 |
% |
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses of $105.0 million increased $2.9 million in the second quarter of 2023 compared to the same period in 2022, and SG&A as a percentage of net sales of 44.4% increased 1,030 basis points versus the second quarter of last year. SG&A expenses in the second quarter of 2023 included a $0.5 million charge for legal and professional fees charged to earnings related to the vinyl CBP detentions. Excluding the impact of the legal fees, adjusted SG&A expense (a non-GAAP measure) increased $2.4 million year-over-year, and adjusted SG&A as a percentage of net sales (a non-GAAP measure) of 44.2% increased 1,010 basis points compared to the second quarter of last year.
Selling, general and administrative ("SG&A") expenses for the first six months of 2023 increased $5.1 million to $206.2 million, or 43.2% of net sales, compared to $201.1 million, or 34.8% of net sales, in the first six months of 2022. SG&A expenses in the first half of 2023 included a $0.8 million charge for legal and professional fees charged to earnings related to the vinyl flooring CBP detentions. Excluding the impact of these fees, adjusted SG&A expense (a non-GAAP measure) increased $4.3 million and adjusted SG&A as a percentage of net sales (a non-GAAP measure) of 43.1% increased 830 basis points for the first half of 2023 compared to the first half of 2022.
The increases in both SG&A and adjusted SG&A as a percentage of net sales for the three months and six months ended June 30, 2023, compared to the same periods in prior year were due primarily to expense deleverage from lower sales volumes. In addition,
19
operating expenses were higher due to inflationary cost increases and planned growth investments partially offset by restructuring cost savings and lower variable costs due to lower sales volume.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||||
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
||||||||
|
|
(in thousands, except percentage data) |
|
|||||||||||||||||||||||||||||
SG&A, as reported (GAAP) |
|
$ |
105,000 |
|
|
|
44.4 |
% |
|
$ |
102,087 |
|
|
|
34.1 |
% |
|
$ |
206,185 |
|
|
|
43.2 |
% |
|
$ |
201,112 |
|
|
|
34.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Legal and Professional Fees3 |
|
|
500 |
|
|
|
0.2 |
% |
|
|
— |
|
|
|
— |
% |
|
|
780 |
|
|
|
0.2 |
% |
|
|
— |
|
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Adjusted SG&A (a non-GAAP measure) |
|
$ |
104,500 |
|
|
|
44.2 |
% |
|
$ |
102,087 |
|
|
|
34.1 |
% |
|
$ |
205,405 |
|
|
|
43.1 |
% |
|
$ |
201,112 |
|
|
|
34.8 |
% |
Operating (Loss) Income and Operating Margin
Operating loss was $20.5 million in the second quarter of 2023, compared to operating income of $4.7 million in the second quarter of 2022. Adjusted operating loss (a non-GAAP measure) of $17.6 million decreased $23.5 million from $5.9 million adjusted operating income (a non-GAAP measure) in the second quarter of 2022. Operating margin of (8.7)% decreased 1,030 basis points compared to the second quarter of last year. Adjusted operating margin (a non-GAAP measure) of (7.5)% decreased 950 basis points compared to the second quarter of last year, which reflects the increased selling, general and administrative expenses and decreased gross profit as described in the above sections.
Operating loss was $33.7 million in the first half of 2023, compared to operating income of $9.7 million in the first half of 2022. Adjusted operating loss (a non-GAAP measure) of $28.4 million decreased $39.1 million from $10.7 million adjusted operating income (a non-GAAP measure) in the first half of 2022. Operating margin of (7.1)% decreased 880 basis points compared to the first half of last year. Adjusted operating margin (a non-GAAP measure) of (5.9)% decreased 780 basis points compared to the first half of last year, which reflects the increased selling, general and administrative expenses and decreased gross profit as described in the above sections.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||||
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
||||||||
|
|
(in thousands, except percentage data) |
|
|||||||||||||||||||||||||||||
Operating (Loss) Income, as reported (GAAP) |
|
$ |
(20,469 |
) |
|
|
(8.7 |
)% |
|
$ |
4,663 |
|
|
|
1.6 |
% |
|
$ |
(33,654 |
) |
|
|
(7.1 |
)% |
|
$ |
9,717 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Gross Margin Adjustment Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Vinyl Charges1 |
|
|
2,352 |
|
|
|
1.0 |
% |
|
|
— |
|
|
|
— |
% |
|
|
4,489 |
|
|
|
0.9 |
% |
|
|
— |
|
|
|
— |
% |
Antidumping and Countervailing Adjustments2 |
|
|
— |
|
|
|
— |
% |
|
|
1,218 |
|
|
|
0.4 |
% |
|
|
— |
|
|
|
— |
% |
|
|
977 |
|
|
|
0.2 |
% |
Gross Margin Adjustment Items Subtotal |
|
|
2,352 |
|
|
|
1.0 |
% |
|
|
1,218 |
|
|
|
0.4 |
% |
|
|
4,489 |
|
|
|
0.9 |
% |
|
|
977 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
SG&A Adjustment Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Legal and Professional Fees3 |
|
|
500 |
|
|
|
0.2 |
% |
|
|
— |
|
|
|
— |
% |
|
|
780 |
|
|
|
0.2 |
% |
|
|
— |
|
|
|
— |
% |
SG&A Adjustment Items Subtotal |
|
|
500 |
|
|
|
0.2 |
% |
|
|
— |
|
|
|
— |
% |
|
|
780 |
|
|
|
0.2 |
% |
|
|
— |
|
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Adjusted Operating (Loss) Income/ Margin (a non-GAAP measure) |
|
$ |
(17,617 |
) |
|
|
(7.5 |
)% |
|
$ |
5,881 |
|
|
|
2.0 |
% |
|
$ |
(28,385 |
) |
|
|
(5.9 |
)% |
|
$ |
10,694 |
|
|
|
1.9 |
% |
1,2,3 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.
20
Other Expense
In the second quarter of 2023, the Company had other expense of $0.7 million compared to $0.2 million in the second quarter of 2022. The prior year expense included interest expense associated with antidumping and countervailing duty rate changes. Excluding the antidumping and countervailing adjustment in the second quarter of 2022, adjusted other expense (a non-GAAP measure) of $0.7 million in the second quarter of 2023 increased $0.6 million from the second quarter of last year. The increase in other expense and adjusted other expense in the second quarter of 2023 is due to the interest on borrowings on our Credit Agreement.
In the first half of 2023, the Company had other expense of $1.8 million compared to $0.2 million in the first half of 2022. The prior year expense was favorably impacted by the reversal of interest expense associated with antidumping and countervailing duty rate changes. Excluding the antidumping and countervailing adjustment in the first half of 2022, adjusted other expense (a non-GAAP measure) of $1.8 million in the first half of 2023 increased $1.6 million from the first half of last year. The increase in other expense and adjusted other expense in the first half of 2023 is due to the interest on borrowings on our Credit Agreement. While both years included interest on borrowings under our Credit Agreement, the Company did not draw down on our Credit Agreement in the first quarter of 2022.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||||
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
||||||||
|
|
(in thousands, except percentage data) |
|
|||||||||||||||||||||||||||||
Other Expense, as reported (GAAP) |
|
$ |
675 |
|
|
|
0.3 |
% |
|
$ |
199 |
|
|
|
0.1 |
% |
|
$ |
1,834 |
|
|
|
0.4 |
% |
|
$ |
184 |
|
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest Impact Related to Antidumping and Countervailing Adjustments4 |
|
|
— |
|
|
|
— |
% |
|
|
83 |
|
|
|
— |
% |
|
|
— |
|
|
|
— |
% |
|
|
(2 |
) |
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Adjusted Other Expense/Adjusted Other Expense as a % of Sales (a non-GAAP measure) |
|
$ |
675 |
|
|
|
0.3 |
% |
|
$ |
116 |
|
|
|
— |
% |
|
$ |
1,834 |
|
|
|
0.4 |
% |
|
$ |
186 |
|
|
|
— |
% |
Provision for Income Taxes
The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision and is adjusted for discrete items that occur within the period.
For the three months ended June 30, 2023, the Company recognized income tax expense of $17.9 million, which represented an effective tax rate of (84.5)%. For the three months ended June 30, 2022, the Company recognized income tax expense of $1.7 million, which represented an effective tax rate of 38.7%. The change in effective tax rate in the current period primarily reflects the impact of recording a valuation allowance on deferred tax assets.
For the six months ended June 30, 2023, the Company recognized income tax expense of $14.1 million, which represented an effective tax rate of (39.7)%. For the six months ended June 30, 2022, the Company recognized income tax expense of $2.8 million, which represented an effective tax rate of 29.0%. The change in effective tax rate is caused by the same drivers of the change in effective tax rate for the quarter.
As of June 30, 2023, a full valuation allowance of $23.2 million has been established against the Company's net deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses, the Company did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets. The Company intends to maintain a valuation allowance on its deferred tax assets unless there is sufficient evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance could result in a significant decrease in income tax expense in the period that the release is recorded. However, the exact timing and amount of any reduction in our valuation
21
allowance are unknown at this time and will be subject to the earnings level we achieve in future periods and estimates of future taxable income and will be made in the period such determination is made.
Net (Loss) Income per Diluted Share
Net loss per diluted share was $1.35 for the quarter ended June 30, 2023, compared to net income per diluted share of $0.09 for the quarter ended June 30, 2022. Adjusted loss per diluted share was $1.28 for the second quarter of 2023, compared to adjusted earnings per diluted share of $0.13 for the second quarter of 2022.
Net loss per diluted share was $1.72 for the six months ended June 30, 2023, compared to net income per diluted share of $0.23 for the six months ended June 30, 2022. Adjusted loss per diluted share was $1.59 for the six months ended June 30, 2023, compared to adjusted earnings per diluted share of $0.26 for the six months ended June 30, 2022.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(in thousands, except per share data) |
|
|||||||||||||
Net (Loss) Income, as reported (GAAP) |
|
$ |
(39,002 |
) |
|
$ |
2,736 |
|
|
$ |
(49,587 |
) |
|
$ |
6,773 |
|
Net (Loss) Income per Diluted Share (GAAP) |
|
$ |
(1.35 |
) |
|
$ |
0.09 |
|
|
$ |
(1.72 |
) |
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross Margin Adjustment Items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vinyl Charges1 |
|
|
2,352 |
|
|
|
— |
|
|
|
4,489 |
|
|
|
— |
|
Antidumping and Countervailing Adjustments2 |
|
|
— |
|
|
|
1,218 |
|
|
|
— |
|
|
|
977 |
|
Gross Margin Adjustment Items Subtotal |
|
|
2,352 |
|
|
|
1,218 |
|
|
|
4,489 |
|
|
|
977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
SG&A Adjustment Items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Legal and Professional Fees3 |
|
|
500 |
|
|
|
— |
|
|
|
780 |
|
|
|
— |
|
SG&A Adjustment Items Subtotal |
|
|
500 |
|
|
|
— |
|
|
|
780 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Expense Adjustment Items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest Impact Related to Antidumping and Countervailing Adjustments4 |
|
|
— |
|
|
|
83 |
|
|
|
— |
|
|
|
(2 |
) |
Other Expense Adjustment Items Subtotal |
|
|
— |
|
|
|
83 |
|
|
|
— |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income Tax Adjustment5 |
|
|
(750 |
) |
|
|
(344 |
) |
|
|
(1,386 |
) |
|
|
(257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted (Loss) Earnings |
|
$ |
(36,900 |
) |
|
$ |
3,693 |
|
|
$ |
(45,704 |
) |
|
$ |
7,491 |
|
Adjusted (Loss) Earnings per Diluted Share (a non-GAAP measure) |
|
$ |
(1.28 |
) |
|
$ |
0.13 |
|
|
$ |
(1.59 |
) |
|
$ |
0.26 |
|
1,2,3,4 See the Gross Profit, SG&A and Other Expense sections above for more detailed explanations of these individual items.
Liquidity, Capital Resources and Cash Flows
Sources of Liquidity
Cash flows from operations supplemented with our long-term borrowings remain sufficient to fund our operations while allowing us to fund our growth initiatives and position LL Flooring for long-term success. As of June 30, 2023, we had liquidity of $145.5 million, consisting of excess availability under our Credit Agreement of $137.8 million and cash and cash equivalents of $7.7 million. This represents an increase in liquidity of $9.9 million from December 31, 2022, primarily reflecting sell throughs of merchandise inventories and the impact of our working capital management on operating cash flows. We believe that cash flows from
22
operations, together with cash on hand, and the liquidity under our Credit Agreement will be sufficient to meet our obligations and fund our settlements, operations, anticipated capital expenditures, and potential share repurchases for the next 12 months.
The Company continues to navigate uncertainty in the macroeconomic environment due to consumer confidence, inflation, volatile mortgage rates impacting housing affordability and lower existing home sales. We prepare our forecasted cash flow and liquidity estimates based on assumptions that we believe to be reasonable but are also inherently uncertain. Actual future cash flows could differ from these estimates.
Capital Resources
As of June 30, 2023, our material contractual obligations consist of long-term debt and letters of credit under our Credit Agreement and leases. See Note 5 to the consolidated financial statements for further detail related to our Credit Agreement. For further detail related to leases, see the Form 10‑K for the year ended December 31, 2022.
Cash Flows Summary
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
Net Cash Provided by (Used in) Operating Activities |
|
$ |
38,962 |
|
|
$ |
(75,982 |
) |
Net Cash Used in Investing Activities |
|
|
(9,768 |
) |
|
|
(11,564 |
) |
Net Cash (Used in) Provided by Financing Activities |
|
|
(32,274 |
) |
|
|
7,389 |
|
Net Decrease in Cash and Cash Equivalents |
|
$ |
(3,080 |
) |
|
$ |
(80,157 |
) |
During the six months ended June 30, 2023, the Company generated $39.0 million of cash flows from operating activities primarily driven by sell throughs of merchandise inventories rebuilt from the prior year end and reduced inventory purchases.
During the six months ended June 30, 2022, the Company used $76.0 million of cash flows for operating activities, which was primarily the result of purchases of inventory ($106.0 million), redemption of customer deposits and store credits ($8.6 million), and payments for legal matters and settlements ($8.0 million), partially offset by increased accounts payable ($25.0 million) and net income ($6.8 million).
Net cash flows used in investing activities included $9.8 million and $11.6 million in capital expenditures in the six months ended June 30, 2023 and 2022, respectively. Capital expenditures in the first half of 2023 were used primarily for investments in technology and digital enhancements to improve the customer experience. Capital expenditures in the first half of 2022 were used primarily for store rebranding, opening new stores, and investments in digital.
Net cash flows used in financing activities was $32.3 million during the six months ended June 30, 2023, compared to net cash flows provided by financing activities of $7.4 million during the six months ended June 30, 2022. The activity in the current year was primarily attributable to $32.0 million of net repayments of outstanding debt under the Credit Agreement. Financing activities during the first six months of 2022 included $15.0 million net borrowings under the Credit Agreement, partially offset by $7.9 million of repurchases of common stock.
Merchandise Inventories
Our net sales fluctuate slightly as a result of seasonal factors, and we adjust merchandise inventories in anticipation of those factors, causing variations in our buildup of merchandise inventories. Generally, we experience higher-than-average net sales in the spring and fall when more home remodeling activities typically take place and lower-than-average net sales in the winter months and during the hottest summer months.
Merchandise inventories as of June 30, 2023 decreased $46.3 million from December 31, 2022 as the Company began to sell through inventory rebuilt from the prior year and reduced inventory purchases. We consider merchandise inventories either “available for sale” or “in-transit,” based on whether we have physically received and inspected the products at an individual store location, in our distribution centers or in another facility where we control and monitor inspection. As a result of our decision to return certain
23
vinyl flooring products detained as a consequence of the UFLPA to the vendor, the $6.0 million of product that no longer represents saleable inventory has been reclassified to “Other Current Assets” on the consolidated balance sheet.
In-transit inventory generally varies due to the timing of certain international shipments and certain seasonal factors, including import holds, international holidays, rainy seasons, and specific merchandise category planning.
Merchandise inventories and available inventory for sale per store in operation were as follows:
|
|
As of |
|
|
As of |
|
|
As of |
|
|||
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
|
June 30, 2022 |
|
|||
|
|
(in thousands) |
|
|||||||||
Inventory – Available for Sale |
|
$ |
263,286 |
|
|
$ |
307,730 |
|
|
$ |
314,124 |
|
Inventory – In-Transit |
|
|
22,750 |
|
|
|
24,566 |
|
|
|
44,680 |
|
Total Merchandise Inventories |
|
$ |
286,036 |
|
|
$ |
332,296 |
|
|
$ |
358,804 |
|
|
|
|
|
|
|
|
|
|
|
|||
Inventory Available for Sale Per Store |
|
$ |
596 |
|
|
$ |
696 |
|
|
$ |
719 |
|
Inventory available for sale per store as of June 30, 2023 decreased compared to December 31, 2022 due to the same drivers as merchandise inventories. Inventory available for sale per store decreased compared to June 30, 2022 reflecting the Company's strategy to utilize the merchandise inventories rebuilt in 2022.
Related Party Transactions
Information with respect to related party transactions may be found in Note 8, “Related Party Transactions”, to the consolidated financial statements in Item 1 of Part I, which is incorporated herein by reference.
Critical Accounting Policies and Estimates
Critical accounting policies are those that we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. We have had no significant changes in our Critical Accounting Policies and Estimates since our annual report on Form 10‑K for the year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk.
The Company can be exposed to interest rate risk because of variable rate borrowings under our Credit Agreement. To the extent the Company borrows at Term SOFR, financial results are subject to changes in the market rate of interest. As of June 30, 2023, we had $40.0 million outstanding under our Revolving Credit Facility, which carried a weighted average interest rate of 6.3% repayable at any time. A hypothetical 1% increase in interest rates would cause an increase of $0.4 million of annual interest if outstanding for the full year.
We currently do not engage in any interest rate hedging activity. However, in the future, to mitigate losses associated with interest rate risks, we may at times enter into derivative financial instruments, although we have not historically done so. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
24
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended June 30, 2023. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023.
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
25
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 7, “Commitments and Contingencies”, to the consolidated financial statements in Item 1 of Part I, which is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents our share repurchase activity for the quarter ended June 30, 2023 (in thousands, except per share data):
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Dollar Value |
|
||||
|
|
|
|
|
|
|
|
of Shares |
|
|
of Shares That May Yet |
|
||||
|
|
|
|
|
|
|
|
Purchased as |
|
|
Be Purchased as |
|
||||
|
|
Total Number |
|
|
Average |
|
|
Part of Publicly |
|
|
Part of Publicly |
|
||||
|
|
of Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Announced |
|
||||
Period |
|
Purchased2 |
|
|
Per Share2 |
|
|
Programs |
|
|
Programs1 |
|
||||
April 1, 2023 to April 30, 2023 |
|
|
— |
|
|
$ |
- |
|
|
|
— |
|
|
$ |
43,000 |
|
May 1, 2023 to May 31, 2023 |
|
|
11 |
|
|
|
3.34 |
|
|
|
— |
|
|
|
43,000 |
|
June 1, 2023 to June 30, 2023 |
|
|
2 |
|
|
|
4.44 |
|
|
|
— |
|
|
|
43,000 |
|
Total |
|
|
13 |
|
|
$ |
3.49 |
|
|
|
— |
|
|
$ |
43,000 |
|
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
26
Item 6. Exhibits.
The exhibits listed in the following exhibit index are furnished as part of this report.
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
10.1 |
|
|
10.2 |
|
|
10.3 |
|
|
10.4 |
|
|
10.5 |
|
|
10.6 |
|
|
10.7 |
|
Form of Restricted Stock Inducement Award Agreement (filed herewith) |
10.8 |
|
Form of Performance Stock Unit Inducement Award Agreement (filed herewith) |
31.1 |
|
|
31.2 |
|
|
32.1 |
|
|
101 |
|
The following financial statements from the Company’s Form 10‑Q for the quarter ended June 30, 2023, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive (Loss) Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
LL FLOORING HOLDINGS, INC. |
|
|
(Registrant) |
|
|
|
Date: August 9, 2023 |
By: |
/s/ Robert L. Madore |
|
|
Robert L. Madore |
|
|
Chief Financial Officer (Principal Financial Officer)
|
|
|
|
28