Lumber Liquidators Reports Second Quarter 2020 Financial Results
Lumber Liquidators, a leading specialty retailer of hard-surface flooring in North America, announced financial results for the second quarter ended June 30, 2020.
“I would like to thank our associates for their commitment, flexibility and dedication to providing outstanding service to our customers during these uncertain times,” said President and Chief Executive Officer Charles Tyson. “As a result of their perseverance, and despite the headwinds of COVID-19 and its impacts on consumers, we delivered meaningful improvement in gross margin and effectively managed expenses to preserve liquidity and increase profitability. While comparable store sales declined 21.3% in in the quarter, execution against our strategic pillars helped deliver a $5.5 million increase in net income and a $2.9 million increase in Adjusted Operating Income compared to prior year. Our strong results would not have been possible without the contributions from all associates, and I am thankful to be a part of such a strong and dedicated team.”
“We were encouraged by improving sales trends through the quarter as markets reopened and consumers began to more fully engage in home improvement projects,” Tyson continued. “I am confident that our continued focus on our transformation plan and strategic pillars, including developing a strong people-centric, diverse and collaborative culture, will position us well for long-term success.”
Second Quarter Results
Net sales in the second quarter of 2020 decreased $58 million, or 20.2%, to $230 million from the second quarter of 2019. Comparable store sales for the second quarter of 2020 were down 21.3% driven by the impact of COVID-19, but improved sequentially as the quarter progressed and improved compared to the previously reported quarter-to-date decline of approximately 30% through May 23. The Company opened two net new stores in the second quarter of 2020 bringing total store count to 422 as of June 30, 2020.
Gross profit decreased 14% in the second quarter of 2020 to $88 million from $102 million in the comparable period in 2019, including the 2019 positive impact of classification adjustments related to tariffs as shown in the tables that follow. Without this item, Adjusted Gross Profit (a non-GAAP measure) decreased approximately $13 million. Adjusted Gross Margin (a non-GAAP measure) increased 309 basis points to 38.3% in the second quarter of 2020 from 35.2% in the second quarter of 2019 as margin enhancement efforts, Section 301 tariff exclusions and supply chain efficiency positively impacted results. Adjusted Gross Margin was also aided by a larger mix of higher-margin manufactured products, a lower mix of lower-margin installation labor sales, and reduced discounting in stores. These items were somewhat offset by a higher year-over-year inventory obsolescence charge and higher customer delivery costs associated with delivery promotions.
SG&A expense decreased 21% to $82 million in the second quarter of 2020 from the comparable period in 2019 but included certain costs in both periods related to investigations and lawsuits. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) decreased 17%, or $16 million, compared to the same period in the prior year. The reduction in Adjusted SG&A was primarily driven by lower advertising expense as the Company reduced its promotional cadence in response to COVID-19; lower payroll and benefits expense as the Company took steps to align staffing with demand levels while also implementing temporary salary reductions for corporate office personnel and the Board of Directors; and lower transaction- and business-related costs due to lower sales. The Company’s focus on expense management, liquidity preservation measures and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A in the quarter.
Operating income was $6 million for the second quarter of 2020 compared to an operating loss of $1.4 million for the second quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was $6.5 million for the second quarter of 2020, a year-over-year increase of over $2.9 million compared to adjusted operating income of $3.6 million for the second quarter of 2019. The year-over-year increase was primarily driven by the work to enhance gross margin while also diligently managing expenses.
Income tax expense was $2.2 million for the second quarter of 2020 compared to income tax expense of $0.4 million for the second quarter of 2019. The variability of our tax rate in 2020 reflects the timing of deductions and the CARES Act on our quarterly earnings.
Net income for the second quarter of 2020 increased $5.5 million to $2.6 million compared to a net loss of $2.9 million for the second quarter of 2019, while Adjusted Earnings (a non-GAAP measure) for the second quarter of 2020 was $3.0 million, a year-over-year increase of $2.2 million compared to Adjusted Earnings of $820 thousand for the second quarter of 2019.
Earnings per diluted share was $0.09 for the second quarter 2020 versus a loss per share of $0.10 in the year ago quarter. On an adjusted basis, second quarter earnings per diluted share increased $0.07 to $0.10 compared to an adjusted earnings per diluted share of $0.03 for the second quarter of 2019.
Net cash provided by operating activities was $106 million for the year to date, inclusive of $70 million in the second quarter, an increase of $120 million over the equivalent period of the prior year. The increase was primarily driven by strong working capital management including adjusting inventory buying plans to reflect lower volumes of activity, and extending payment terms with vendors, landlords and other service providers, as well as growth in customer deposits, and reduced tariff and income tax receivables as cash payments were received during the second quarter. In addition, lower cash outflows related to legacy legal settlements and lower expenses aided the year-over-year comparison.
As of June 30, 2020, the Company had $76 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan. Collectively, this is a $19 million increase from the end of the fourth quarter 2019 while the cash and cash equivalents balance increased by $118 million. As of June 30, 2020, the Company had $186 million in liquidity, comprised of $127 million of cash and cash equivalents and $59 million of availability under the Credit Agreement.
The second quarter of 2020 was significantly affected by the COVID-19 pandemic, but the Company remained focused on serving its customers while keeping the health and safety of employees’ and customers’ paramount. The Company operated in a variety of operating models (fully open, curbside-pickup, online) during the quarter and utilized safety measures such as personal protective equipment for employees and customers. Additional measures included contact-free and appointment-based engagement with customers, adding barriers at registers and social distancing signage and guidelines to stores. These practices were implemented to comply with state and local ordinances along with recommendations from the CDC and State Boards of Health. By early July, 98% of stores were fully open, with less than 10 operating by appointment only. Only one store remained closed since the onset of the pandemic due to a unique store design while others closed periodically as warranted by market conditions. As reported in the Company’s first quarter earnings release, quarter-to-date comparable store sales were down approximately 30% through the week ended May 23. Improving performance in June resulted in a negative 21.3% comparable store sales for the full quarter.
Throughout the quarter, the Company leveraged strategic investments in digital capabilities made over the past 18 months, including the Floor Finder and Picture It! tools, to serve customers at LLFlooring.com. Web traffic has increased meaningfully, particularly when store showrooms had limited availability. The Company has also expanded availability of online flooring samples and extended hours for voice and click-to-chat customer support, while also continuing to offer curbside store pickup and enhanced home-delivery options.
In April, as a result of reduced demand and the changes in operating models due to COVID-19, the Company temporarily furloughed a number of store associates and reduced operating hours in its distribution centers. As demand returned through the quarter, the Company recalled associates, and as of late June, had invited all furloughed employees back to work and had returned to normal operations in its distribution centers. The Company implemented a range of other measures to increase financial flexibility and maintain agility during this challenging time. As a result of improved business trends, the temporary reduction in all salaried corporate employees’ and Board of Directors’ compensation ended effective July 1, 2020.
As of June 30, 2020, the Company had liquidity of approximately $186 million, consisting of excess availability under its Credit Agreement of $59 million, and cash and cash equivalents of $127 million. This represents an increase in liquidity of $55 million from March 31, 2020. In addition, the Company’s debt balance as of June 30, 2020 was $101 million, unchanged since amending the Credit Agreement on April 17.
As previously announced, on April 17, 2020, the Company amended its Credit Agreement to increase total availability under the Senior Secured Credit Facilities from $200 million to $237.5 million, and increased the advance rate against inventory under the borrowing base. This amendment expires August 30, 2020. The current credit agreement maturity remains March 2024 and contains no financial covenants, except for a fixed charge coverage ratio if borrowings exceed 90% of availability.
Based on what we know today about the impact of COVID-19, the Company believes that cash flows from operations, together with the liquidity under its Credit Agreement, provides sufficient liquidity to navigate the current environment.
Section 301 Tariffs
On November 7, 2019, the U.S. Trade Representative granted a retroactive exclusion on certain “click” vinyl and engineered products imported from China. The Company is monitoring the expiration of this exclusion currently slated for August 7, 2020. Should the tariff exclusion not be extended, there would be an impact to cash flow related to future product purchases, but the impact to gross margin will be delayed based primarily on the flow of inventory.
As previously announced on April 20, 2020, the Company withdrew its annual financial guidance that was initially provided on February 25, 2020. The uncertainty surrounding the duration and extent of the impact of COVID-19 makes it uniquely challenging to accurately forecast future financial performance, and as such, the Company is not providing financial guidance at this time.
For the full second quarter results, click here.
About Lumber Liquidators
Lumber Liquidators is one of North America’s leading specialty retailers of hard-surface flooring with 422 stores as of June 30, 2020. The Company features more than 400 varieties of floors in the latest styles, including waterproof vinyl plank, solid and engineered hardwood, laminate, bamboo, porcelain tile and cork flooring. Additionally, Lumber Liquidators provides a wide selection of flooring enhancements and accessories to complement, install and maintain new floors. Every location is staffed with flooring experts who can provide advice, pro services and installation options for all of Lumber Liquidators’ products, much of which is in stock and ready for delivery.
Source: Lumber Liquidators Holdings, Inc.