Q1 2024 LL Flooring Holdings Inc Earnings Call

Participants

Bruce Williams; Investor Relations; LL Flooring Holdings Inc

Charles Tyson; President, Chief Executive Officer, Director; LL Flooring Holdings Inc

Robert Madore; Chief Financial Officer, Executive Vice President, Chief Accounting Officer; LL Flooring Holdings Inc

Laura Champine; Analyst; Loop Capital Markets LLC

Presentation

Operator

Hello, and welcome to today's LL Flooring Q1 24 earnings conference call. My name is Bailey, and I'll be the moderator for today. (Operator instructions)
I'd now like to pass the conference over to Bruce Williams with Investor Relations. Please go ahead when you're ready.

Bruce Williams

Thank you, operator. Good morning, everyone, and thank you for joining us. Today, I'm joined by Charles Tyson, our President and Chief Executive Officer; and Bob Madore, Chief Financial Officer.
As we begin, let me reference the safe harbor provisions of the US securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of LL Flooring. Although LL Flooring believes that the expectations reflected in its forward-looking statements are reasonable. It can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in LL Flooring filings with the SEC.
During today's call, management will be discussing results on an adjusted basis and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in today's earnings. The information contained in this call is accurate only as of the date discussed.
Now I would like to turn the call over to Charles. Charles?

Charles Tyson

Thanks Bruce, and thank you for joining LL Flooring for our Q1 earnings conference call. Joining me on the call is Bob Madore, Chief Financial Officer. During today's call, we will go through our first-quarter results and provide an update on our strategic initiatives that we believe will position LL Flooring as the premier national specialty retailer that delivers the possible one on one expertise of an independent with the value and scale of a national retailer.
Our first quarter results continued to be challenged as weaker existing home sales, elevated interest rates and inflation have led to softness in home improvement, remodel and big ticket discretionary spending. These challenging macro factors have pushed home improvement spend by housing units below its 50-year average impacting the remodel industry. The leading indicators continue to predict that spending on remodel activity will remain challenged through 2024.
Now, I will review our first quarter results. We continue to experience pressure from the macro environment. With that said, we believe that we are also impacted by our low brand awareness. During the quarter, we took steps to increase our brand exposure through brand partnerships to drive consumer sales. And we also focused marketing initiatives to drive awareness with our Pro customer, which I will address later. We are also making progress on closing the gaps in store execution, which our field teams are aggressively pack. Total revenues declined 21.7% and comp store sales declined 21.5%, driven by continued declines in traffic as well as lower average project sizes from our consumer and to a lesser extent, our Pro customers.
Despite the market challenges, the company experienced several positive highlights worth noting west region, which was our most challenging region over the last several quarters, saw a significant improvement as execution of our strategic initiatives in the field began to take hold. This was largely offset by headwinds, specifically in Florida, that market anniversaries last year's major hurricane impact during the quarter, our field teams did a good job of accelerating our proactive selling and outreach to pros, and we added new capabilities to our e-commerce site.
As a result, we experienced a sequential improvement in new orders, driven by a meaningful pickup in our digital business and an improvement in both consumer and installation services. Notably, we continued to see new order performance improve in April, driven by both an improvement in our Pro business, where our teams are using CRM to drive new opportunities for consumer, we ran our annual April sale and consumers responded positively driven by the tremendous values created by our merchandising teams for the first quarter we reported an adjusted operating loss of $28.7 million, primarily due to sales deleverage. While we're operating in a very difficult environment, we are actively engaging a number of initiatives to improve our liquidity and cost structure. First, our supply chain teams are doing an outstanding job effectively managing our inventory to improve our liquidity position. While we're managing inventories to the run rate of sales. We're very pleased with our inventory position, and we are in-stock with quality product assortment that our customers expect. Second, we are pursuing a potential sale leaseback of our approximately 1 million square foot center in Virginia distribution center. We have also engaged, with other hand lucky to explore additional financing alternatives.
Third, we know our expense structure is being negatively impacted by sales deleverage. However, we have several initiatives underway to actively address our operating expenses and are implementing further actions to reduce costs across the Company. We believe that the macro challenges impacting project size and spending will remain in place throughout the year. However, we continue to be optimistic that the long-term tailwinds regarding home improvement spending continue to be in place driven by the aging housing stock, increased household formation and also rising home values.
When the cycle for home improvement spending normalizes, we believe that LL Flooring is in a unique position to gain share in this highly fragmented industry by providing the expertise of an independent retailer with national scale advantages, we are operating with a sense of urgency, but to that end, we're focusing on executing against our strategies that we believe will have LL Flooring well positioned in the marketplace.
As we look forward, we remain focused on executing on our brand transformation and our five strategic initiatives, which are investing in our growth priorities, which include growing our Pro business, driving customer engagement through our CRM rollout, increasing brand awareness and driving product innovation and coffee and ensuring a consistent customer experience for Pro. I'm encouraged by the execution that our field teams are making against our Pro initiatives. We implemented our CRM platform with the Pro customers in the back half of last year.
And we're seeing progress on moving from a transactional selling culture to a relationship building culture with our Pro customers during the quarter, we took the learnings from the last quarter and we aggressively expanded our proactive selling outreach to lapsed customers. And while early, we experienced a strong improvement in retention and reengagement of those customers coming back to the brand. In March, we executed a new PRO digital marketing campaign to emphasize our strong value propositions such as product stock warehouses in every store one-on-one support expertise and everyday Pro pricing that positions us well in all segments of the Pro marketplace.
During the fourth quarter, we piloted our program in three markets to grow our business. The national accounts program generated a sequential improvement in new orders in the first quarter. And as such, we've expanded the pilot nationwide. We rolled out CRM to consumer at the end of Q4, and we're beginning to experience an increase in the dollar value of opportunities for our DIY customers. This is a significant leading indicator for us as new opportunities in the pipeline, lead to new orders and ultimately ship sales. While our proactive selling tools give us a better opportunity for conversion without having to rely on promotions and discounts as it relates to our initiatives to improve the customer experience, we continue to see operational variability across the store network.
We are focused on improving our underperforming regions and on improving the consistency of execution at the store level, I'm very pleased that our NPS scores increased to its highest levels across Pro installation services and still low scores are critical to us and demonstrate that we're proving as a partner to our customers and providing value by being price competitive, being in-stock and building relationships with our customers as we continue to firm up and deepen our field organization. We're seeing some improvement in regional variability. For example, our West Coast region has improved their execution, which has led to the West Coast region being a top-performing region for the first quarter.
As I mentioned earlier, we experienced a meaningful sequential improvement in our digital business. Customers are responding favorably to our added functionality such as the launch of tend to quote where consumers can pay for quotes online, driving faster conversion.
In our hardwood business, we continue to invest in our Bellawood brand, driven by trends for wood species and finishes. The expertise of our teams on selling our value proposition clearly differentiates us in the marketplace, especially with our ability to drive an end to end solution from inspiration to installation. Our Vinyl business saw significant headwinds due to both lower units and ASP declines. The last year, the ASP declines were due to industry pricing pressure as input costs have declined compared to last year. We expect pricing to normalize in the back half of the year as we anniversary this ASP pressure. We continue to make investments in innovation with our re nature by core lux brand, which is a hypo allergenic product that PVC free water scratch and dent resistance. We are also investing in our industry-leading ecofriendly Duravana, which further differentiates us in this category.
Within our corporate initiative, we added carpet to 58 more stores in the first quarter that ended the quarter with carpet in 142 stores. We firmly believe that strategically adding copper to our category portfolio broadens our appeal to a wider audience that want the convenience of purchasing soft and hard surfaces under one roof as a reminder, adding call, it requires minimal working capital commitments as product is shipped directly from the manufacturer as our corporate penetration increases. We're expanding category awareness through marketing highlights our corporate value proposition.
In addition, we continue to enhance our product assortment and are also integrating installation services with our network to provide a seamless experience for our customers. Based on our strategy of building a product brand portfolio, we will continue to expand our corporate rollout to 75 additional stores in Q2. We believe that our low brand awareness has also contributed to our traffic challenges. However, we're implementing a variety of marketing strategies that are beginning to rebuild our customer pipeline.
We are increasing our exposure by expanding our brand media partnerships such as our partnership with the NCAA through March Madness, we are leaning into messages that demonstrate our differentiated product offerings like Bellawood and or Avantec, but diversifying our channel mix to attract a new audience within digital media. We are gaining efficiencies with our spend, and we're also aggressively using our CRM tools to drive more direct marketing campaigns for our consumer customers, for example, using our marketing resources to reengage our consumer database file and sending very targeted messages to customers that intend to follow up to customers that are at various stages in the sales cycle.
We believe that we have the tools in place that will drive greater returns from our marketing efforts. We are focused on unlocking additional cash cost savings. We have a number of work streams that are occurring with a mandate of rationalizing costs out of the system. While we have made significant progress with our working capital management, we believe there are additional opportunities to drive additional improvements. Lastly, we've also been disciplined around capital allocation that have lowered our expected capital spend for the year.
Finally, before I turn the call over to Bob. I will note that last week we provided an update on the strategic alternatives review process, which we announced last August. In our update on April 29th. We reiterate that the Board is committed to a fair process for all interested parties, and we'll continue to thoroughly review any credible proposal received to determine the course of action that it believes is in the best interest of the company and all of its shareholders. I will not be providing any further update or answering questions on that process at this time.
In conclusion, the macro environment remains challenged for home improvement spending, and we expect that challenges due to elevated prices, higher interest rates and lower housing turnover well positioned in 2024 although we are not standing still with laser focus on executing our five strategic initiatives, focusing on growing our Pro business, continuing to drive customer engagement through our CRM rollout, increasing our brand awareness, enhancing our product offerings through innovative products and expanding on our corporate initiatives as well as ensuring a consistent customer experience.
In addition, we will continue to be disciplined with working capital and aggressively and urgently manage costs and liquidity. I want to thank all our team members for helping to execute against our strategies while delivering excellent customer service that are reflected by our high NPS scores despite the current macro headwinds, we believe that executing on our strategic initiatives while LL Flooring well positioned in the marketplace as the cycle normalizes.
I will now be turning the call over to Bob to share our financial details and outlook. Bob?

Robert Madore

Thanks, Charles, and good morning, everyone.
Today I'll walk through our first-quarter financial results, and I'll be discussing certain non-GAAP adjusted numbers today, which eliminates certain items that are not indicative of our core business results. For full details regarding our financial results, please refer to our earnings press release on the Investor Relations section of our website.
For the first quarter, business conditions remained challenged. Net sales of $188.5 million decreased 21.7% versus the prior year period, driven by continued declines in consumer and to a lesser degree, EnPro. Comparable sales decreased 21.5% year over year, driven by an 18.5% decline in comp transactions and a 3% decline in average ticket. Average retail price per merchandise unit sold declined 4.4% compared to the first quarter in the prior year.
Gross profit of $71.2 million decreased 19.1% or $16.8 million compared to the first quarter of 2023 and gross margin of 37.8% increased 120 basis points compared to the same period last year. Adjusted gross profit of $69.9 million declined $20.3 million and adjusted gross margin declined 40 basis points to 37.1% versus the same period last year.
Lower transportation costs were more than offset by higher vinyl sourcing costs and lower ASP due to industry pricing pressures during the quarter. Adjusted SG&A expense of $98.6 million was 52.3% as a percentage of sales compared to $100.9 million or 41.9% of net sales in the first quarter of 2023. The decrease in SG&A and adjusted SG&A expense were driven by lower variable costs and savings realized by cost reduction efforts, partially offset by expense deleverage from lower sales volumes.
As Charles has mentioned, we continue to optimize operating efficiency to rightsize our cost structure. Actions taken in the first quarter included operational restructuring and expense curtailment activities while continuing to preserve investments in our growth initiatives. Quarter to date, the SG&A reductions totaled approximately $4 million.
Other expense for the first quarter increased $400,000 to $1.5 million. The increase in other expense, primarily driven by higher interest expense due to higher average debt levels. As a result, first-quarter operating loss was $27.4 million compared to an operating loss of $13.2 million in the prior year. Adjusted operating loss, a non-GAAP measure, was $28.7 million compared to $10.8 million last year.
Now turning to our balance sheet and cash flow. We continue to work diligently to optimize our working capital and rightsize our inventories to demand. For that end, inventories declined by $59 million or 19% year over year. We saw significant improvement in our working capital. We will continue to focus on disciplined inventory management and other working capital components.
In terms of liquidity, we ended the quarter with $63.3 million, comprised of $6 million in cash and $57.3 million of availability under our revolving credit facility. The decrease of $54.9 million of liquidity compared to the end of 2023, primarily due to reduction in the borrowing base partially resulting from lower inventory. As of March 31, 2024, there was $89 million outstanding under the revolving credit facility compared to $47 million from the comparable prior year period and $66 million at the end of 2023.
As noted in our Form 10-Q filing this morning, we are pursuing a potential sale leaseback of approximately 1 million square foot sands in Virginia distribution center, which is a highly desirable location. This action, along with our Dallas distribution center, positions us to execute our long-term supply chain network strategy by optimizing our distribution footprint and will provide additional liquidity for the company. In addition, as Charles mentioned, we have also retained who had WorldGate to evaluate financing alternatives.
Moving on to our store network, we are 435 stores in our portfolio, and we do not plan to have net store growth in 2024, we are constantly looking for ways to optimize our store network. Looking ahead, we expect to continue to navigate a challenging macro economic environment through the remainder of the year. We are not providing specific earnings guidance, but let me provide some additional color on our perspective for the year, the Company expects full year revenues to continue to be challenged, primarily due to the macro uncertainty. Despite these cyclical factors, we remain focused on executing against our strategic initiatives.
Turning to gross margin, we expect to continue to benefit from lower transportation costs, partially offset by higher vinyl sourcing costs and some reinvestment into pricing.
In regard to inventory, we remain focused on disciplined inventory management, and we'll continue to manage our inventory to the run rate of sales. We will look to identify further efficiencies through execution of our working capital initiatives.
Lastly, we will continue to prudently manage expenses and focus on aligning our cost structure with our current rate of sales.
In terms of capital expenditures, we're lowering our spend to approximately $30 million in 2024, primarily to support our strategic investments, including our corporate rollout.
With that, I'll turn the call back to Charles.

Question and Answer Session

Operator

(Operator instructions)
Laura Champine, Loop Capital.

Laura Champine

And thank you for taking my question. It's on the SG&A expense line. I know that a few months ago we were expecting to grow that this year. How much can you reasonably pull it back in terms of either dollars or percentage spend year on year?

Charles Tyson

We're thanks for that question. You know, this quarter we reduced SG&A expenses by over $2 million net versus some same period last year. And had another sequential reduction as you compare SG&A spend against Q4. Also in the quarter, we realized just under $5 million of savings from a number of our different activities and initiatives. And we feel like we've got an additional runway on probably a very similar rate of reduction that I just communicated that we achieved in the quarter.

Laura Champine

Okay. So is it that rate, it's tough for me to get to a profitability level. It's certainly on the sales pace.
What sales level do you think LL Flooring needs be profitable?

Charles Tyson

Yes. I believe anywhere between on $930 million and $1 billion with our infrastructure rate as it exists today. But as I mentioned, we've got additional activities and initiatives that we've not only completed a number of in Q1 that drove that $5 million of savings, but it will continue for Q2 three and four at a somewhat similar reduction rate and let me add it or to I think you know what, Laura, while we're talking about the extra dollar environment, we really do have a low share, which gives us a good opportunity to grow our top line sales. Obviously, we've got our corporate initiative, which will be in over 200 stores by the end of Q2.
And we continue to be pleased with the performance in CRM in terms of pro relationship building and what we're beginning to see in those opportunities. So we're very focused on the cost side of our business is we see plenty of opportunities even in a in a in a softer market to us to expand the business, whether it's the successes we're seeing with Bellawood and our business, our category expansions or new product category expansions or new channels like our national account. So we're attacking our business very aggressively, both on our cost side, but just as equally on the sales side.

Laura Champine

Got it. Thank you.

Charles Tyson

Thank you, Laura.

Operator

Thank you, This will conclude today's question-and-answer session. So I'd like to pass it back over to Charles Tyson for any closing remarks.

Charles Tyson

Thank you, operator, and thank you for joining our Q1 2024 earnings call today. Again, I want to thank all of our team members for their hard work, delighting our customers during the quarter, and we look forward to talking to you next quarter.
Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.