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) |
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(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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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 May 03, 2024, there are
LL FLOORING HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10‑Q
FOR THE QUARTER ENDED MARCH 31, 2024
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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March 31, |
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December 31, |
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2024 |
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2023 |
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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, Net |
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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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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 (Unaudited)
In Thousands, Except Per Share Data
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Three Months Ended March 31, |
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2024 |
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2023 |
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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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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 |
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( |
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( |
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Other Expense |
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Loss Before Income Taxes |
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( |
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Income Tax Expense (Benefit) |
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( |
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Net Loss and Comprehensive Loss |
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$ |
( |
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$ |
( |
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Net Loss per Common Share—Basic |
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$ |
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$ |
( |
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Net Loss per Common Share—Diluted |
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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
For the Three Months Ended March 31, 2024 and 2023 |
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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, 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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March 31, 2023 |
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$ |
( |
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$ |
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$ |
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$ |
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December 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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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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March 31, 2024 |
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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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Three Months Ended March 31, |
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2024 |
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2023 |
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Cash Flows from Operating Activities: |
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Net Loss |
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$ |
( |
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$ |
( |
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Adjustments to Reconcile Net Loss: |
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Depreciation and Amortization |
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Deferred Income Taxes (Benefit) Provision |
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— |
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( |
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Income on Redeemed Vouchers 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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(Gain) Loss on Disposal of Fixed Assets |
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( |
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— |
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Changes in Operating Assets and Liabilities: |
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Merchandise Inventories |
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Accounts Payable |
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( |
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Customer Deposits and Store Credits |
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Prepaid Expenses and Other Current Assets |
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( |
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Accrued Compensation |
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( |
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( |
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Accrual (Payment) 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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Net Cash (Used in) Provided by Operating Activities |
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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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( |
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Net Cash Provided by (Used in) 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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Cash paid for interest |
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$ |
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$ |
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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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( |
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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. ("LL Flooring" or "Company") engages in business as a multi-channel specialty retailer of flooring, and 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. In addition, the Company also began offering carpet during 2023. The Company also provides in-home delivery and installation services to its customers. The Company primarily sells to consumers or to flooring focused professionals such as flooring installers, remodelers, and small to medium home builders ("Pros") on behalf of consumers through a network of store locations in metropolitan areas. As of March 31, 2024, 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, 2023.
The consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Liquidity and Going Concern
Pursuant to the requirements of the Financial Accounting Standards Board's Accounting Standards Codification ("ASC") Topic 205-40, Presentation of Financial Statements - Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company's ability to continue as a going concern. The mitigating effect of management's plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company had cash and cash equivalents of approximately $
To alleviate these conditions, management plans to sell and enter into a sale leaseback transaction for its Sandston distribution center, which, as a result, met the criteria for held for sale after the balance sheet date. Proceeds from the sale leaseback
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transaction are expected to be sufficient to fund the Company's operations and prevent triggering its fixed charge coverage ratio covenant for a period of at least twelve months subsequent to the issuance of these unaudited consolidated financial statements.
The accompanying unaudited consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. This also means that the accompanying unaudited consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above, which could be material.
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.
Inventory for the Company's soft surface offerings is also recorded at the lower of cost or net realizable value and is removed from inventory at weighted average cost. The Company does not maintain carpet inventory in stock. Instead it relies on the logistics and distribution capabilities of its single source supplier to deliver inventory to the installers who install the Company's carpet product for its customers. All purchases made via purchase order are recorded as inventory when shipped from the suppliers location and the Company obtains control of the inventory.
Recognition of Net Sales
The Company generates revenues primarily by retailing merchandise in the form of hard-surface flooring, carpet, 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 stores and its digital platform, LLFlooring.com. The Company’s agreements with its customers are of short duration (less than a year), and as such the Company has elected not to disclose revenue for partially satisfied contracts that will be completed in the days following the end of a period as permitted by GAAP. The Company reports its revenues exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, consistent with past practice.
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
7
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 March 31, |
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2024 |
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2023 |
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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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New Deposits |
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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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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 $
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 March 31, |
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2024 |
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2023 |
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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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Solid and Engineered Hardwood |
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% |
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% |
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Moldings and Accessories and Other2 |
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% |
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% |
|
||||
Installation and Delivery Services |
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|
% |
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|
|
|
|
% |
|
||||
Total |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
||||
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.
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
8
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.
Accounting Pronouncements Not Yet Adopted
In November, 2023, the FASB issued Accounting Standards Update ("ASU") No. 2023-07, "Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant expenses. The updated standard is effective for annual periods beginning in fiscal 2024 and interim periods beginning in the first quarter of fiscal 2025. Early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU.
In December, 2023, the FASB issued ASU No. 2023-09 "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" which requires two primary enhancements of 1) disaggregated information on a reporting entity's effective tax rate reconciliation, and 2) information on income taxes paid. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU.
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:
|
|
Three Months Ended March 31, |
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|
|||||
|
|
2024 |
|
|
2023 |
|
|
||
|
|
(in thousands, except per share data) |
|||||||
Net Loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Weighted Average Common Shares Outstanding—Basic |
|
|
|
|
|
|
|
||
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
||
Common Stock Equivalents |
|
|
— |
|
|
|
— |
|
|
Weighted Average Common Shares Outstanding—Diluted |
|
|
|
|
|
|
|
||
Net Loss per Common Share—Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
Net Loss per Common Share—Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
The following shares have been excluded from the computation of Weighted Average Common Shares Outstanding—Diluted because the effect would be anti-dilutive:
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
2024 |
|
|
2023 |
|
|
||
Stock Options |
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|
|
|
|
|
|
||
Restricted Shares |
|
|
|
|
|
|
|
||
Stock Repurchase Program
In February 2012, the Company’s board of directors adopted an authorization for the repurchase of up to a total of $
9
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"):
|
|
Stock Options |
|
|
Restricted Stock Awards |
|
||
|
|
(in thousands) |
|
|||||
Options Outstanding/Nonvested RSAs, December 31, 2023 |
|
|
|
|
|
|
||
Granted |
|
|
— |
|
|
|
— |
|
Options Exercised/RSAs Released |
|
|
— |
|
|
|
( |
) |
Forfeited |
|
|
( |
) |
|
|
( |
) |
Options Outstanding/Nonvested RSAs, March 31, 2024 |
|
|
|
|
|
|
||
The Company granted
The Company’s non-employee directors are compensated with an annual RSA grant, which is made under the Company's equity incentive plan. The amount of outstanding nonvested RSAs granted to non-employee directors was
Stock-based compensation expense attributable to the Company's share-based equity awards 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.
10
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 $
As of March 31, 2024, there was $
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.
For the three months ended March 31, 2024, the Company recognized an income tax expense of $
In 2023, the Company established a valuation allowance on its net deferred tax assets. As of March 31, 2024, the Company has a full valuation allowance of $
In 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. Upon careful consideration and examination, the Company computed and recorded a contingent liability for $
11
Note 7. Commitments and Contingencies
|
|
December 31, 2023 |
|
|
|
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|
|
|
|
|
|
|
|
|
|
March 31, 2024 |
|
||||||
Litigation Matter |
|
Accrual for Legal Matters |
|
|
|
|
|
Settlement |
|
|
Vouchers |
|
|
Vouchers |
|
|
Accrual for Legal Matters |
|
||||||
Description |
|
and Settlements - Current |
|
|
Accruals |
|
|
Payments |
|
|
Redeemed |
|
|
Expired |
|
|
and Settlements - Current |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
MDL |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
||
Gold |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
$ |
|
||
Other Matters |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
$ |
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
|||
|
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|
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||||||
|
|
December 31, 2022 |
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|
|
March 31, 2023 |
|
||||||
Litigation Matter |
|
Accrual for Legal Matters |
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|
|
|
|
Settlement |
|
|
Vouchers |
|
|
Vouchers |
|
|
Accrual for Legal Matters |
|
||||||
Description |
|
and Settlements - Current |
|
|
Accruals |
|
|
Payments |
|
|
Redeemed |
|
|
Expired |
|
|
and Settlements - Current |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
MDL |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
||
Gold |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
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|
||
Other Matters |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
|
||
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
||
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 March 31, 2024, 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 $
12
As of March 31, 2024, the remaining accrual related to these matters was $
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 recognizes a receivable or accrues a payable depending on where that final rate compares to the deposits it has made. The final rate amounts are not accrued by the Company until the DOC publishes these rates or the Company receives a notice from CBP, as such the rate amounts are not probable or reasonably estimable until that time. The Company and/or the domestic manufacturers can appeal the final rate for any period and, and the DOC can place a hold on final settlement by CBP 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 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.
The outstanding AD and CVD principal balances are detailed in the table that follows under the corresponding consolidated balance sheet line item. These amounts represent what the Company would receive or pay (net of any collections or payments) as the result of subsequent adjustment to rates whether due to finalization by the DOC or because of action of a court based on appeals by various parties. These amounts do not include any initial amounts paid for AD or CVD in the current period at the in-effect rate at that time.
The Company recorded net interest income related to antidumping and countervailing duties of $
13
Antidumping |
|
|||||||||||||||
Review Period |
|
Period Covered |
|
Deposited Rates1 |
|
Determined Rates2 |
|
Other Current Assets |
|
Other Current Liabilities |
|
Other Long-Term Liabilities |
|
|||
|
|
|
|
|
|
|
|
(in thousands) |
|
|||||||
1 |
|
May 2011 - Nov 2012 |
|
|
|
$ |
|
$ |
— |
|
$ |
— |
|
|||
2 |
|
Dec 2012 - Nov 2013 |
|
|
|
|
— |
|
|
( |
) |
|
— |
|
||
3 |
|
Dec 2013 - Nov 2014 |
|
|
|
|
|
|
— |
|
|
— |
|
|||
4 |
|
Dec 2014 - Nov 2015 |
|
|
|
|
— |
|
|
— |
|
|
— |
|
||
5 |
|
Dec 2015 - Nov 2016 |
|
|
|
|
— |
|
|
— |
|
|
— |
|
||
6 |
|
Dec 2016 - Nov 2017 |
|
|
|
|
|
|
— |
|
|
( |
) |
|||
7 |
|
Dec 2017 - Nov 2018 |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
||
8 |
|
Dec 2018 - Nov 2019 |
|
|
|
|
— |
|
|
— |
|
|
— |
|
||
9 |
|
Dec 2019 - Nov 2020 |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
||
Total Principal Balance as of March 31, 2024 |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Countervailing |
|
|||||||||||||||
Review Period |
|
Period Covered |
|
Deposited Rates1 |
|
Determined Rates2 |
|
Other Current Assets |
|
Other Current Liabilities |
|
Other Long-Term Liabilities |
|
|||
|
|
|
|
|
|
|
|
(in thousands) |
|
|||||||
1 & 2 |
|
Apr 2011 - Dec 2012 |
|
|
|
$ |
|
$ |
— |
|
$ |
— |
|
|||
3 |
|
Jan 2013 - Dec 2013 |
|
|
|
|
|
|
— |
|
|
— |
|
|||
4 |
|
Jan 2014 - Dec 2014 |
|
|
|
|
|
|
— |
|
|
— |
|
|||
5 |
|
Jan 2015 - Dec 2015 |
|
|
|
|
|
|
— |
|
|
— |
|
|||
6 |
|
Jan 2016 - Dec 2016 |
|
|
|
|
— |
|
|
( |
) |
|
— |
|
||
7 |
|
Jan 2017 - Dec 2017 |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
||
8 |
|
Jan 2018 - Dec 2018 |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
||
9 |
|
Jan 2019 - Dec 2019 |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
||
Total Principal Balance as of March 31, 2024 |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
|||||||
1 These are the rates determined by the DOC which the Company deposited at upon import. Multiple rates are listed if the timing of the DOC update to the deposit rate fell within the period, resulting in the remaining deposits for that period to be made at the updated rate.
2 These rates represent the current published weighted average rate after initial review or after finalization of the appeals process, with multiple rates listed if applied to different producers and/or exporters.
3 This is the published weighted average rate determined by the DOC for this period which is currently under appeal and, as a result, the period remains open.
4 This is the final published weighted average rate determined by the DOC after completion of the appeals process. Liquidation instructions have been issued, but CBP has not fully liquidated the entries in this period. As such, the period remains open.
5 This is the final published weighted average rate determined by the DOC after completion of the appeals process. This period of review has been completed and fully liquidated and is now closed.
6 In October 2023, the higher weighted average rate 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.
14
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
Beginning in the second quarter of 2023, F9 Investments, LLC, has filed a Schedule 13D (and three subsequent amendments) with the SEC indicating beneficial ownership of more than
15
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:
16
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, 2023.
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, 2023.
Overview
LL Flooring is one of the leading specialty retailers of flooring in the U.S. with 435 stores as of March 31, 2024. 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. In addition, the Company also began offering carpet during 2023. 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 and soft 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; (vi) Adjusted Operating Margin Loss; (vii) Adjusted Other Expense; (viii) Adjusted Other Expense as a Percentage of Net Sales; (ix) Adjusted Loss; and (x) Adjusted Loss 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
17
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-routine, or 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
We continue to navigate uncertainty in the macroeconomic environment due to low consumer confidence, inflation, an elevated interest and mortgage rate environment and lower existing home sales. Despite external headwinds, 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.
Our results for the first quarter 2024 continue to be negatively impacted by the macroeconomic environment as well as internal challenges that we are focused on as we execute against our strategic initiatives. To that end, we remain committed and continue to execute on our five strategic initiatives, which include: growing our Pro business; driving customer engagement through our CRM system; increasing our brand awareness; driving product innovation and the expansion of carpet; and ensuring a consistent customer experience across all our stores and our omnichannel network. We believe each initiative will improve sales productivity and profitability in the long term.
First, we are focusing investments on our top growth priorities to drive sales, including further harnessing the capabilities of our Customer Relationship Management ("CRM") system to generate more opportunities, expanding our carpet offering across our store portfolio, and delivering exceptional service to the Pro customer.
We continue enhancing our omnichannel brand campaign as we continue to focus on growing our brand awareness. Further, we believe brands that are innovating and creating new products will win in the long term, and we continuously build on the strengths of our merchandising and sourcing teams to enhance our product offerings.
We remain focused on identifying further efficiencies and further improving our inventory management practices to yield continued improvements in our overall working capital. We regularly review our store portfolio for profitability and cash flow, and closed two underperforming stores that did not meet expectations during the first quarter of 2024.
We initiated a strategic review of our cost structure in 2023, and since the initiation of this review, we have achieved savings of $17.7 million, with approximately $4.4 million of those savings realized in the first quarter of 2024. We continue to prudently manage expenses and focus on aligning our cost structure with our current rate of sales to preserve profitability.
We believe the foundation we are laying through our five strategic initiatives will make us more differentiated in the market with a better customer experience, and this gives us confidence that we will return to growth as the economic environment improves and, in the long term, regain share in what we believe will be a growing industry that is driven by long-term tailwinds for hard surface flooring and remodels such as aging housing stock, increased household formation, and rising home values.
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 2023, the CBP requested 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. However, we determined it was most cost effective to return the majority of the product that had been detained by CBP to the affected vendor.
We mitigated 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 rebuilt stock keeping units ("SKUs") in the vinyl category, and returned to normal levels of inventory in that category by the end of 2023.
18
Despite our robust compliance program and mitigation efforts, it is possible that future shipments of vinyl flooring could be impacted by UFLPA holds. We are unable to predict whether other product shipments will be impacted in the future and, whether this issue could have further material impacts on sales and margins as we progress throughout 2024. 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, 2023.
Results of Operations
The tables below set forth our unaudited interim consolidated results of operations, expressed in thousands and as a percentage of net sales, for the periods presented. 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. Our unaudited interim consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods.
|
|
Three Months Ended March 31, |
|
|
2024 |
|
||||||
|
|
2024 |
|
|
2023 |
|
|
vs. 2023 |
|
|||
Net Sales |
|
|
|
|
|
|
|
|
|
|||
Net Merchandise Sales |
|
$ |
164,715 |
|
|
$ |
210,497 |
|
|
$ |
(45,782 |
) |
Net Services Sales |
|
|
23,775 |
|
|
|
30,201 |
|
|
|
(6,426 |
) |
Total Net Sales |
|
|
188,490 |
|
|
|
240,698 |
|
|
|
(52,208 |
) |
Gross Profit |
|
|
71,173 |
|
|
|
88,000 |
|
|
|
(16,827 |
) |
Selling, General and Administrative Expenses |
|
|
98,565 |
|
|
|
101,185 |
|
|
|
(2,620 |
) |
Operating Loss |
|
|
(27,392 |
) |
|
|
(13,185 |
) |
|
|
(14,207 |
) |
Other Expense |
|
|
1,526 |
|
|
|
1,159 |
|
|
|
367 |
|
Loss Before Income Taxes |
|
|
(28,918 |
) |
|
|
(14,344 |
) |
|
|
(14,574 |
) |
Income Tax (Benefit) Expense |
|
|
52 |
|
|
|
(3,759 |
) |
|
|
3,811 |
|
Net Loss and Comprehensive Loss |
|
$ |
(28,970 |
) |
|
$ |
(10,585 |
) |
|
$ |
(18,385 |
) |
|
|
|
|
|
|
|
|
% (Decrease) |
|
|||
|
|
% of Net Sales |
|
|
in Dollar |
|
||||||
|
|
Three Months Ended March 31, |
|
|
2024 |
|
||||||
|
|
2024 |
|
|
2023 |
|
|
vs. 2023 |
|
|||
Net Sales |
|
|
|
|
|
|
|
|
|
|||
Net Merchandise Sales |
|
|
87.4 |
% |
|
|
87.5 |
% |
|
|
(21.7 |
)% |
Net Services Sales |
|
|
12.6 |
% |
|
|
12.5 |
% |
|
|
(21.3 |
)% |
Total Net Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(21.7 |
)% |
Gross Profit |
|
|
37.8 |
% |
|
|
36.6 |
% |
|
|
(19.1 |
)% |
Selling, General and Administrative Expenses |
|
|
52.3 |
% |
|
|
42.0 |
% |
|
|
(2.6 |
)% |
Operating Loss |
|
|
(14.5 |
)% |
|
|
(5.5 |
)% |
|
|
107.8 |
% |
Other Expense |
|
|
0.8 |
% |
|
|
0.5 |
% |
|
|
31.7 |
% |
Loss Before Income Taxes |
|
|
(15.3 |
)% |
|
|
(6.0 |
)% |
|
|
101.6 |
% |
Income Tax (Benefit) Expense |
|
|
0.0 |
% |
|
|
(1.6 |
)% |
|
|
(101.4 |
)% |
Net Loss and Comprehensive Loss |
|
|
(15.3 |
)% |
|
|
(4.4 |
)% |
|
|
173.7 |
% |
19
|
|
|
|
|
|
|
|
|
% Increase |
|
|||
|
|
|
|
|
|
in Dollar |
|
||||||
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
||||||
|
|
|
2024 |
|
|
2023 |
|
|
vs. 2023 |
|
|||
SELECTED SALES DATA |
|
|
|
|
|
|
|
|
|
|
|||
Average Sale1 |
|
|
$ |
1,714 |
|
|
$ |
1,767 |
|
|
|
(3.0 |
)% |
Comparable Store Net Sales (Decrease)2 |
|
|
|
(21.5 |
)% |
|
|
(15.4 |
)% |
|
|
|
|
Transaction Count (Decrease)3 |
|
|
|
(18.5 |
)% |
|
|
(19.6 |
)% |
|
|
|
|
Average Retail Price per Unit Sold (Decrease) Increase4 |
|
|
|
(4.4 |
)% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Number of Stores Open, end of period |
|
|
|
435 |
|
|
|
443 |
|
|
|
|
|
Number of Stores Opened (Closed) in Period, net |
|
|
|
(2 |
) |
|
|
1 |
|
|
|
|
|
Number of Stores Relocated in Period5 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Net Sales
Net sales decreased $52.2 million, or 21.7%, to $188.5 million from $240.7 million for the three months ended March 31, 2024 and 2023, respectively. Comparable store net sales for the quarter decreased 21.5% primarily attributable to lower transaction counts and average ticket size in both Pro and Consumer customer channels. The decline in both cases were driven by the continued headwinds from the difficult macroeconomic environment and ongoing brand awareness challenges.
Gross Profit
Gross profit decreased 19.1% in the first quarter of 2024 to $71.2 million from $88.0 million in the comparable period in 2023, and gross margin of 37.8% increased 120 basis points compared to the first quarter last year. The decrease in gross profit was primarily due to lower sales volume attributable to lower transaction counts and average ticket size. The increase in gross margin is primarily driven by the recovery of costs from suppliers related to CBP detentions on flooring products that contain PVC as a consequence of the UFLPA that were previously expensed. The increase in gross margin was further driven by lower transportation costs as inbound container costs have come down, as well as lower turn rates of our inventory, partially offset by higher vinyl sourcing costs as we increased sourcing from domestic vendors and lower average selling price due to industry pricing pressure.
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 7% and 16% during the first quarter of 2024 and 2023, respectively. 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.
20
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
||||
|
(in thousands, except percentage data) |
|
||||||||||||||
Gross Profit/Margin, as reported (GAAP) |
|
$ |
71,173 |
|
|
|
37.8 |
% |
|
$ |
88,000 |
|
|
|
36.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vinyl Charges1 |
|
|
(1,304 |
) |
|
|
(0.7 |
)% |
|
|
2,138 |
|
|
|
0.9 |
% |
Adjustment Items Subtotal |
|
|
(1,304 |
) |
|
|
(0.7 |
)% |
|
|
2,138 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted Gross Profit/Margin (non-GAAP measures) |
|
$ |
69,869 |
|
|
|
37.1 |
% |
|
$ |
90,138 |
|
|
|
37.5 |
% |
1 This amount represents costs (recoveries) related to CBP detentions on flooring products that contain PVC as a consequence of the UFLPA. In the first quarter of 2024, we recovered charges previously incurred from vendors for vinyl flooring products affected under the UFLPA.
Adjusted gross profit (a non-GAAP measure) of $69.9 million decreased $20.3 million and adjusted gross margin (a non-GAAP measure) of 37.1% decreased 40 basis points compared to the same period last year. The decrease in adjusted gross profit was driven by lower sales volume attributable to a decrease in transaction counts and average ticket size. The decrease in adjusted gross margin (a non-GAAP measure) was primarily due to higher vinyl sourcing costs as we increased sourcing from domestic vendors and lower average selling price due to industry pricing pressure, partially offset by lower transportation costs.
Selling, General and Administrative Expenses
SG&A expenses of $98.6 million was 52.3% as a percentage of net sales in the first quarter of 2024, compared to $101.2 million or 42.0% of net sales in the first quarter of 2023. SG&A expense in the first quarter of 2023 included a $0.3 million charge for legal fees charged to earnings related to the CBP request for additional documentation on imports of flooring products that contain PVC as a consequence of the UFLPA. There were no such legal fees incurred during the first quarter of 2024. Adjusted SG&A expense (a non-GAAP measure) was $98.6 million or 52.3% as a percentage of net sales in the first quarter of 2024, compared to $100.9 million or 41.9% of net sales in the first quarter of 2023. The decreases in both SG&A and adjusted SG&A expense for the quarter reflected restructuring cost savings and lower variable costs due to lower sales volumes, partially offset by investment in our growth priorities and long-term initiatives such as the rollout of carpet, and increases in occupancy.
The increases in both SG&A, and adjusted SG&A, as a percentage of net sales for the three months ended March 31, 2024, compared to the same period in the prior year were due primarily to expense deleverage from lower sales volumes.
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
||||
|
(in thousands, except percentage data) |
|
||||||||||||||
SG&A, as reported (GAAP) |
|
$ |
98,565 |
|
|
|
52.3 |
% |
|
$ |
101,184 |
|
|
|
42.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Legal and Professional Fees1 |
|
|
— |
|
|
|
0.0 |
% |
|
|
280 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted SG&A (a non-GAAP measure) |
|
$ |
98,565 |
|
|
|
52.3 |
% |
|
$ |
100,904 |
|
|
|
41.9 |
% |
1 This amount represents incremental legal and professional fees charged to earnings related to the vinyl CBP detentions. This does not include all legal costs incurred by the Company.
Operating Loss and Operating Margin Loss
Operating loss was $27.4 million for the first quarter of 2024 compared to $13.2 million in the first quarter of 2023, and operating margin loss was 14.5% for the first quarter of 2024, compared to 5.5% in the first quarter of 2023. Adjusted operating loss (a non-GAAP measure) was $28.7 million dollars compared to $10.8 million last year, and adjusted operating margin loss (a non-GAAP measure) was 15.2% in the first quarter of 2024, compared to 4.5% in the first quarter of last year. The increase in operating
21
loss and operating margin loss, as well as adjusted operating loss and adjusted operating margin loss, reflect the increased selling, general and administrative expenses and decreased gross profit as described in the above sections.
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||
|
|
$ |
|
|
% of Sales |
|
|
$ |
|
|
% of Sales |
|
||||
|
(in thousands, except percentage data) |
|
||||||||||||||
Operating Loss, as reported (GAAP) |
|
$ |
(27,392 |
) |
|
|
(14.5 |
)% |
|
$ |
(13,185 |
) |
|
|
(5.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross Profit/Margin Adjustment Items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vinyl Charges1 |
|
|
(1,304 |
) |
|
|
(0.7 |
)% |
|
|
2,138 |
|
|
|
0.9 |
% |
Gross Profit/Margin Adjustment Items Subtotal |
|
|
(1,304 |
) |
|
|
(0.7 |
)% |
|
|
2,138 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
SG&A Adjustment Items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Legal and Professional Fees2 |
|
|
— |
|
|
|
0.0 |
% |
|
|
280 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted Operating Loss / Margin (a non-GAAP measure) |
|
$ |
(28,696 |
) |
|
|
(15.2 |
)% |
|
$ |
(10,767 |
) |
|
|
(4.5 |
)% |
1,2 See the Gross Profit/Margin and SG&A sections above for more detailed explanations of these individual items.
Other Expense
In the first quarter of 2024, other expense and adjusted other expense of $1.5 million increased $0.4 million compared to the first quarter of 2023, primarily driven by interest on borrowings on our Credit Agreement as a result of higher average debt levels and interest rates.
Provision for Income Taxes
For the three months ended March 31, 2024, the Company recognized income tax benefit of $0.1 million, which represented an effective tax rate of (0.2)%. For the three months ended March 31, 2023, the Company recognized income tax benefit of $3.8 million, which represented an effective tax rate of 26.3%. The change in effective tax rate is a result of the establishment of a full valuation allowance in the second quarter of 2023.
22
Net Loss per Diluted Share
Net loss per diluted share was $1.00 for the first quarter compared to $0.37 for the first quarter of last year. Adjusted loss per diluted share (a non-GAAP measure) was $1.04 for the first quarter compared to $0.31 for the first quarter of last year.
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands, except per share data) |
|
||||||
Net Loss, as reported (GAAP) |
|
|
$ |
(28,970 |
) |
|
$ |
(10,585 |
) |
Net Loss per Diluted Share (GAAP) |
|
|
$ |
(1.00 |
) |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
||
Gross Profit/Margin Adjustment Items: |
|
|
|
|
|
|
|
||
Vinyl Charges1 |
|
|
|
(1,304 |
) |
|
|
2,138 |
|
Gross Profit/Margin Adjustment Items Subtotal |
|
|
|
(1,304 |
) |
|
|
2,138 |
|
|
|
|
|
|
|
|
|
||
SG&A Adjustment Items: |
|
|
|
|
|
|
|
||
Legal and Professional Fees2 |
|
|
|
— |
|
|
|
280 |
|
SG&A Adjustment Items Subtotal |
|
|
|
— |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
||
Income Tax Adjustment3 |
|
|
|
333 |
|
|
|
(636 |
) |
|
|
|
|
|
|
|
|
||
Adjusted Loss |
|
|
$ |
(29,941 |
) |
|
$ |
(8,803 |
) |
Adjusted Loss per Diluted Share (a non-GAAP measure) |
|
|
$ |
(1.04 |
) |
|
$ |
(0.31 |
) |
1,2 See the Gross Profit/Margin, SG&A and Other Expense sections above for more detailed explanations of these individual items.
3 Income tax adjustment is defined as the sum of Gross Profit/Margin, SG&A, and Other Expense adjustment items multiplied by the Company’s federal incremental rate, which was 25.6% and 26.3% for the three month period ended March 31, 2024 and 2023, respectively.
Liquidity, Capital Resources and Cash Flows
Sources of Liquidity
As of March 31, 2024, we had liquidity of $63.3 million, consisting of excess availability under our Credit Agreement of $57.3 million and cash and cash equivalents of $6.0 million. This represents a decrease in liquidity of $54.9 million from December 31, 2023, primarily driven in part by a decrease in the cap in availability to $153.9 million from $182.5 million as of March 31, 2024 and December 31, 2023, respectively, as well as an increase in our overall outstanding debt to $89.0 million from $66.0 million as of March 31, 2024 and December 31, 2023, respectively. The cap availability under our credit agreement is based on certain assets, including our inventory. We could see the cap in availability further decline in future years if our inventory balances decline.
The Company continues to navigate uncertainty in the macroeconomic environment due to low 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.
Pursuant to the requirements of the Financial Accounting Standards Board's Accounting Standards Codification ("ASC") Topic 205-40, Presentation of Financial Statements - Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company's ability to continue as a going concern. The mitigating effect of management's plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the
23
relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company had cash and cash equivalents of approximately $6.0 million, $89.0 million outstanding under the Revolving Credit Facility, a net loss of $29.0 million, and $57.3 million of borrowing availability under the Credit Agreement for the quarter ended March 31, 2024. The Company’s ability to continue as a going concern is dependent on its ability to generate sufficient sales, profitability, and liquidity to meet the Company's obligations and maintain the minimum borrowing availability to prevent triggering its fixed charge coverage ratio covenant. Under terms of the Credit Agreement, the fixed charge coverage ratio is only required when specified availability under the Revolving Credit Facility falls below the greater of $17.5 million or 10% of the Revolving Loan Cap (as defined in the Credit Agreement). The Company believes that its projected levels of liquidity will not be sufficient to maintain compliance with this covenant in the fourth quarter of 2024. These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.
To alleviate these conditions, management plans to sell and enter into a sale leaseback transaction for its Sandston, Virginia distribution center, which, as a result, met the criteria for held for sale after the balance sheet date. The current net book value of the distribution center as of March 31, 2024, was approximately $39.6 million, which is significantly lower than its prospective market value based on third party information obtained by the Company. Proceeds from such a sale leaseback transaction will be sufficient to fund the Company's operations and prevent triggering its fixed charge coverage ratio covenant for a period of at least twelve months subsequent to the issuance of these unaudited condensed consolidated financial statements. We believe the sale of Sandston, along with our Dallas distribution center, positions us to better execute on our long term supply chain network strategy by optimizing our distribution footprint.
In addition, management is currently evaluating various funding alternatives that are intended to further alleviate these conditions and may seek to raise additional funds by obtaining additional credit from various financial institutions or refinancing the Company's Revolving Credit Facility with its existing lenders. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to refinance or obtain additional financing in the debt markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.
See "Risk Factor - The inability to access our Revolving Credit Facility or other sources of capital, could cause our financial position, liquidity, and results of operations to suffer" in the Company's annual report filed on Form 10-K for the year ended December 31, 2023, as well as "Risk Factor - We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern, and it is possible that management's plans to alleviate substantial doubt may be unsuccessful" in Part II, Item 1A of this quarterly report.
Capital Resources
As of March 31, 2024, 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, 2023.
Cash Flows Summary
|
|
Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Net Cash (Used in) Provided by Operating Activities |
|
$ |
(23,689 |
) |
|
$ |
26,149 |
|
Net Cash Used in Investing Activities |
|
|
(1,855 |
) |
|
|
(4,741 |
) |
Net Cash Provided by (Used in) Financing Activities |
|
|
22,740 |
|
|
|
(25,231 |
) |
Net Decrease in Cash and Cash Equivalents |
|
$ |
(2,804 |
) |
|
$ |
(3,823 |
) |
During the three months ended March 31, 2024, the Company used $23.7 million of cash flows from operating activities, which was primarily driven by our net losses in the quarter and a decrease in accounts payable due to the timing of payments, partially
24
offset by working capital improvements with respect to merchandise inventory as we continue to manage our inventories to the run-rate of sales.
Net cash flows used in investing activities included $1.9 million and $4.7 million in capital expenditures in the three months ended March 31, 2024 and 2023, respectively. The decrease of $2.8 million in net cash flows used in investing activities is primarily attributable to our reduced investment in new stores and our distribution center in Texas that went live in the third quarter of 2023, partially offset by our investment in carpet.
Net cash flows provided by financing activities were $22.7 million during the three months ended March 31, 2024, compared to net cash flows used in financing activities of $25.2 million during the three months ended March 31, 2023. The activity in the current year was primarily attributable to $23.0 million of net borrowings under the Credit Agreement. Financing activities during the three months ended March 31, 2023 included $25.0 million net payments under the Credit Agreement.
Merchandise Inventories
Merchandise inventories as of March 31, 2024 decreased $17.0 million from December 31, 2023, primarily due to the Company having scaled back purchasing to return to more optimal inventory levels and align purchasing with current sales trends. 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.
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 |
|
|||
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
|
March 31, 2023 |
|
|||
|
|
(in thousands) |
|
|||||||||
Inventory – Available for Sale |
|
$ |
232,652 |
|
|
$ |
248,737 |
|
|
$ |
284,462 |
|
Inventory – In-Transit |
|
|
15,619 |
|
|
|
16,553 |
|
|
|
23,276 |
|
Total Merchandise Inventories |
|
$ |
248,271 |
|
|
$ |
265,290 |
|
|
$ |
307,738 |
|
|
|
|
|
|
|
|
|
|
|
|||
Inventory Available for Sale Per Store |
|
$ |
535 |
|
|
$ |
569 |
|
|
$ |
642 |
|
Inventory available for sale per store as of March 31, 2024 decreased compared to December 31, 2023 and March 31, 2023 due to the same drivers as merchandise inventories.
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, 2023.
25
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 March 31, 2024, we had $89.0 million outstanding under our Revolving Credit Facility, which carried a weighted average interest rate of 7.0% repayable at any time. A hypothetical 1% increase in interest rates would cause an increase of $0.9 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.
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 March 31, 2024. 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 March 31, 2024.
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.
26
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.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern, and it is possible that management's plans to alleviate substantial doubt may be unsuccessful.
During the first quarter of 2024, management identified conditions that raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of the first quarter 2024 unaudited consolidated financial statements. As described more fully in Note 1 to the unaudited consolidated financial statements included herein, to alleviate these conditions, management plans to sell and enter into a sale leaseback transaction for its Sandston distribution center. In addition, management is currently evaluating various funding alternatives that are intended to further alleviate these conditions and may seek to raise additional funds. Our ability to refinance or obtain additional financing, including in the debt markets, is subject to several factors, such as market and economic conditions, our performance and investor sentiment with respect to us and our industry. Though management has concluded that it is probable the sale leaseback transaction for the Sandston distribution center will alleviate substantial doubt about the Company’s ability to continue as a going concern, if these actions are unsuccessful or if we are unable to obtain sufficient funding to support our operations, we could be forced to delay, reduce or eliminate our capital expenditures and strategic initiatives and may be unable to alleviate conditions that raise substantial doubt regarding our ability to continue as a going concern. Substantial doubt about our ability to continue as a going concern may affect the price of our common stock, may impact our relationship with third parties with whom we do business, including our customers, vendors, lenders and employees, may impact our ability to raise additional capital and may impact our ability to comply, going forward, with certain covenants in our debt agreements, which could significantly and materially restrict our operations.
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, 2023, 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 March 31, 2024 (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 |
|
||||
January 1, 2024 to January 31, 2024 |
|
|
— |
|
|
|
- |
|
|
|
— |
|
|
|
43,000 |
|
February 1, 2024 to February 29, 2024 |
|
|
9,421 |
|
|
|
2.14 |
|
|
|
— |
|
|
|
43,000 |
|
March 1, 2024 to March 31, 2024 |
|
|
127,917 |
|
|
|
1.85 |
|
|
|
— |
|
|
|
43,000 |
|
Total |
|
|
137,338 |
|
|
$ |
1.87 |
|
|
|
— |
|
|
$ |
43,000 |
|
27
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
28
Item 6. Exhibits.
The exhibits listed in the following exhibit index are filed or incorporated by reference as part of this report.
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
10.1 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1 |
|
|
101 |
|
The following financial statements from the Company’s Form 10‑Q for the quarter ended March 31, 2024, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Loss, (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) |
29
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: May 8, 2024 |
By: |
/s/ Robert L. Madore |
|
|
Robert L. Madore |
|
|
Chief Financial Officer (Principal Financial Officer)
|
|
|
|
30