LL Flooring Holdings, Inc. (LL) Q4 2023 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary presents several negative indicators, such as a significant revenue decline, operating loss, and macroeconomic challenges. While there are efforts to manage inventory and a carpet rollout initiative, the lack of clear guidance on strategic alternatives and the macroeconomic environment's uncertainty contribute to a negative outlook. The Q&A session did not provide substantial positive insights to offset these issues, reinforcing a negative sentiment.
Key Financial Performance
Net Sales $211.8 million, decreased 19.7% year-over-year, driven by declines in Pro and consumer segments.
Comparable Sales Decreased 20.2% year-over-year, driven by a 17.8% decline in transactions and a 1.7% decline in average ticket.
Average Retail Price per Merchandise Units Sold Declined 2.8% compared to the fourth quarter in the prior year.
Adjusted Gross Profit $81.1 million, decreased 13.9% or $13.1 million compared to the fourth quarter of 2022, while adjusted margin increased 260 basis points due to vendor cost outs and lower transportation costs.
Full Year Net Sales $904.7 million, declined 18.5% year-over-year.
Full Year Gross Profit $322.7 million, with a gross margin of 35.7%. Adjusted gross profit was $338.9 million compared to $401.6 million in the prior year.
Adjusted SG&A Expense $99.2 million, 46.8% of sales, compared to $102.4 million or 38.8% of net sales in the fourth quarter of 2022, driven by lower variable costs and savings from cost structure review.
Fourth Quarter Operating Loss $17.5 million, compared to an operating loss of $17.3 million in the prior year.
Adjusted Operating Loss $18.2 million, compared to $8.2 million last year.
Fourth Quarter Net Loss per Share $0.62, compared to a loss of $0.53 last year.
Adjusted Loss per Share $0.64, compared to $0.29 in the prior year period.
Full Year Operating Loss $80.8 million, compared to an operating loss of $11.7 million in the prior year.
Full Year Adjusted Operating Loss $63.7 million, compared to $1.8 million last year.
Full Year Net Loss per Share $3.59, compared to a loss of $0.42 last year.
Full Year Adjusted Loss per Share $3.01, compared to $0.17 in the prior year period.
Inventory Declined by $67 million or 20% for the year, in line with comp sales decline.
Liquidity $118.2 million, comprised of $8.8 million in cash and $109.4 million of availability under revolving credit facility.
Outstanding Debt under Revolving Credit Facility $66 million, compared to $72 million as of December 31, 2022.
Net Cash Flow from Operating Activities $21.3 million, driven by sell-throughs of higher-cost merchandise inventories and effective working capital management.
CapEx $17 million, primarily for strategic initiatives including carpet expansion.
Store Count 437 stores, with no net store growth planned for 2024.
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Operating Highlights
New Product Launches: Introduced ReNature by Coreluxe, a hypoallergenic, waterproof, scratch and dent resistant vinyl product.
Carpet Rollout: Expanded carpet offerings to 84 stores, with plans for further expansion in 2024.
Duravana Brand: Premium Duravana brand continues to receive positive customer feedback, combining features of vinyl and laminate.
Market Expansion: Targeting the $13 billion carpet market opportunity with ongoing expansion of carpet offerings.
Brand Awareness Improvement: Achieved a 300 basis points improvement in aided brand awareness.
Inventory Management: Reduced inventory by $67 million or 20%, while maintaining high in-stock standards.
Cost Management: Realized $12 million in cost initiatives and focused on optimizing operating efficiencies.
Strategic Initiatives: Focusing on growing Pro business, enhancing customer engagement through CRM, and improving product offerings.
Supply Chain Realignment: Reduced reliance on China for materials to mitigate supply chain disruptions.
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Risk or Challenges
Economic Factors: Weaker existing home sales, elevated interest rates, and inflation have led to softness in home improvement and remodel spending. Existing home sales declined 6.1% year-on-year, with December at its lowest level in 30 years. Home remodeling spending is expected to decline in 2024 for the first time since 2010.
Sales Performance: Total revenues declined 19.7% in Q4, with comparable store sales down 20.2%, driven by decreased traffic and lower average project sizes.
Supply Chain Challenges: The company faced supply chain disruptions due to the Uyghur Forced Labor Prevention Act and is working to reduce reliance on China for materials. Potential disruptions and higher freight costs may arise from ongoing conflicts in the Red Sea.
Regulatory Issues: The Uyghur Forced Labor Prevention Act has impacted supply chain operations, necessitating a realignment to mitigate disruptions.
Competitive Pressures: The flooring industry remains highly fragmented with significant competition from independent retailers, which poses challenges for market share capture.
Liquidity and Debt Management: Despite challenges, the company managed to reduce debt and maintain liquidity, ending the quarter with $118.2 million in liquidity, but with a decrease in availability under the revolving credit facility.
Operational Losses: The company reported an adjusted operating loss of $18.2 million in Q4, reflecting sales deleverage and ongoing economic pressures.
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Guidance & Outlook
Strategic Initiatives: LL Flooring is focused on five strategic initiatives: 1) Growing the Pro business, 2) Driving customer engagement through CRM rollout, 3) Increasing brand awareness, 4) Enhancing product offerings through innovation and carpet expansion, and 5) Ensuring a consistent customer experience.
Product Innovation: The company is expanding its carpet offerings, which opens up a $13 billion market opportunity, and has launched new products like ReNature by Coreluxe, a hypoallergenic and waterproof vinyl.
Cost Management: LL Flooring is committed to managing costs and liquidity aggressively, with a focus on optimizing operating efficiencies and right-sizing its cost structure.
Inventory Management: The company successfully reduced inventory by $67 million or 20% while maintaining high in-stock standards.
Revenue Expectations: Full year revenues are expected to remain challenged due to macroeconomic uncertainty, with no specific earnings guidance provided.
CapEx Projections: Capital expenditures are expected to be approximately $15 million in 2024, primarily for strategic investments including carpet rollout.
Gross Margin Outlook: While gross margin expansion was achieved in 2023, higher shipping costs may arise due to geopolitical events, potentially impacting supply chain costs in late 2024.
Debt Management: The company ended the year with $66 million outstanding under its revolving credit facility, indicating effective debt management despite challenges.
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Shareholder Return Plan
Shareholder Return Plan: In August of last year, the Board announced that they would be evaluating strategic alternatives that would maximize shareholder value. The Board is continuing their review.
Debt Management: Despite the sales decline, LL Flooring managed to reduce debt on its balance sheet.
Liquidity Position: As of December 31, 2023, the company ended the quarter with $118.2 million in liquidity, which includes $8.8 million in cash and $109.4 million available under its revolving credit facility.
Capital Expenditures: CapEx was $17 million, primarily reflecting investments in strategic initiatives, including carpet expansion.
Future Guidance: The company is not providing specific earnings guidance for the year but expects full-year revenues to continue to be challenged due to macro uncertainty.
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Key Q&A
Q:What's behind the decision to keep spending incremental dollars on SG&A even as the store count and sales decline?
A:We continue to make investments in our carpet rollout, which has been successful in the initial 84 stores. This increases available customers and is crucial for us as an end-to-end flooring provider. We don't carry inventory for that product, which positively impacts working capital. We see this as a strategy to drive growth and build our brand.
Q:If that's 84 stores today, what's the plan for this time next year?
A:In the next quarter, we're rolling out 54 more stores and will provide updates on the full year rollout in future quarters.
Q:Is there a contemplated scenario where you generate cash from ops again this year? And if so, how much of an inventory cut would you need to hit that goal?
A:We managed working capital well in 2023, with inventory down 20%, contributing to operating cash flow. We see further opportunities to align inventory with sales performance, which will positively impact operating cash flow in 2024.
Q:Review of Unclear Management Responses
A:Management did not provide a specific figure for how much inventory cut would be needed to generate cash from operations, which lacked clarity.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CRM Pro
Pros
Red Sea
SGA expense
associate manager
capital investment
carpet launch
carpet rollout
challenge
comp sale
comp store
contributor cash
debt balance
disruption
expansion carpet
experience store
home improvement
home sale
independent
indicator
interest
inventory line
investment carpet
knowledge
leader sale
learning
line comp
loss share
margin expansion
past
positioning
product availability
product transportation
response
sale decline
size inventory
spending home
tool associate
update Flooring
wood
LL Transcript
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