LL Flooring Reports Fourth Quarter and Full Year 2020 Financial Results
Lumber Liquidators (“LL Flooring” or “Company”), a leading specialty retailer of hard-surface flooring in North America, today announced financial results for the fourth quarter and full year ended December 31, 2020.
“We closed 2020 strong with fourth quarter comparable sales up 10.5%, reflecting continued execution on our transformation plan that positioned us to capitalize on robust consumer demand for home improvement projects,” said President and Chief Executive Officer Charles Tyson. “I am pleased with the progress our team is making on our four strategic pillars: people and culture, improving the customer experience, driving traffic and transactions, and improving profitability. For the full year 2020, we delivered $1.1 billion of net sales, demonstrating resilience as we navigated the COVID-19 shut down in the spring to grow comparable sales 10.8% in the second half. Our profitability initiatives drove a $40 million increase in operating income and a 360 basis points increase in operating margin on similar net sales versus 2019. I want to thank our team members for serving our customers every day to deliver these impressive results.
“So far in 2021, our industry continues to benefit from consumer investment in home improvement. That said, there remains a good deal of uncertainty due to COVID-19, potential changes in consumer spending priorities and supply chain volatility. We are well positioned with a strong balance sheet and the financial flexibility to continue to execute our transformation, allowing us to adjust quickly to the environment, if needed. We strive to become the customers’ first choice in hard-surface flooring by providing the best experience from start to finish, and plan to differentiate ourselves by offering the high-quality selection, expertise and high-touch service of a local store combined with the scale, omni-channel convenience and value of a national brand. We see substantial opportunity ahead to continue to evolve our Company and increase shareholder value over the long term.”
Fourth Quarter Results
Net sales in the fourth quarter of 2020 increased $30.4 million, or 11.1%, to $304.2 million from the fourth quarter of 2019. Comparable store sales for the fourth quarter of 2020 increased 10.5% primarily as a result of continued execution against the Company’s transformation plan and healthy consumer demand for home improvement projects. Net merchandise sales increased 11.2% while net services sales (install and freight) increased 10.2% over the prior year. As previously announced, the Company closed 14 stores and opened one new store in the fourth quarter of 2020 bringing total store count to 410 as of December 31, 2020.
Gross profit increased 5.4% in the fourth quarter of 2020 to $117.9 million from $111.9 million in the comparable period in 2019 and gross margin decreased 210 basis points to 38.8% in the fourth quarter of 2020 from 40.9% in the fourth quarter of 2019. For the fourth quarter of 2020, the Company reported a net positive $1.8 million impact from anti-dumping and countervailing duty rate changes compared to 2019. Additionally, the fourth quarter of 2020 included costs related to Canadian and US store closures. Excluding these items as shown on the table that follows, Adjusted Gross Profit (a non-GAAP measure) increased by $3.5 million and Adjusted Gross Margin (a non-GAAP measure) decreased by 290 basis points. The decrease in adjusted gross margin was due to last year’s approximately $13 million benefit from the retroactive exclusion of tariffs on certain flooring products imported from China (discussed in the “Section 301 Tariffs” section that follows) partially offset by merchandising sourcing and cost-out efforts, and, to a lesser extent, selective retail price increases.
SG&A expense increased 7.5% to $99.6 million, or 32.7% of sales, down 110 basis points in the fourth quarter of 2020 from the comparable period in 2019. SG&A in both quarters included certain costs related to legal matters. Additionally, the fourth quarter of 2020 included $1.2 million of costs related to Canadian and US store closures. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) increased 4.4% to $97.0 million. The increase in adjusted SG&A was primarily driven by higher bonuses and commissions consistent with the Company’s strong financial performance. As a percent of sales, adjusted SG&A leveraged 200 basis points, to 31.9% of sales, compared to 33.9% for the same period in the prior year.
Operating income was $18.4 million for the fourth quarter of 2020 compared to $19.3 million for the fourth quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was $18.8 million for the fourth quarter of 2020, a year-over-year decrease of $0.6 million compared to adjusted operating income of $19.4 million for the fourth quarter of 2019. The year-over-year decrease was more than fully due to the approximately $11 million benefit to adjusted operating income in the fourth quarter of 2019 as a result of the retroactive exclusion of tariffs (discussed in the “Section 301 Tariffs” section that follows), which did not repeat in the fourth quarter of 2020, mostly offset by higher net sales, merchandising sourcing and cost-out efforts, and selective retail price increases, and SG&A leverage in 2020.
The Company had other income of $68 thousand for the three months ended December 31, 2020 compared to other expense of $0.5 million for the three months ended December 31, 2019. Both years reflected interest on borrowings on our Credit Agreement. The interest expense on borrowings in 2020 was offset by a favorable adjustment of $1.2 million for the reversal of interest expense associated with anti-dumping and countervailing duty rate changes.
In the fourth quarter of 2020, the Company determined that it was no longer in a consolidated three-year cumulative loss position and released the valuation allowance recorded against most of its U.S. deferred tax assets. As a result, for the three months ended December 31, 2020, the Company recognized an income tax benefit of $12.6 million, driven by the partial release of the valuation allowance of $19.6 million, and the deferred tax impact of the CARES Act and other items to true up discrete provisions recorded in 2020. Absent these items, the rate would have approximated the statutory rate. For the three months ended December 31, 2019, the Company recognized income tax expense of $2.4 million.
Net income for the fourth quarter of 2020 increased $14.7 million to $31.1 million compared to $16.4 million for the fourth quarter of 2019, while Adjusted Earnings (a non-GAAP measure) for the fourth quarter of 2020 were $31.4 million, a year-over-year increase of $15.0 million compared to adjusted earnings of $16.4 million for the fourth quarter of 2019.
Earnings per diluted share was $1.05 for the fourth quarter 2020 versus $0.57 in the year ago quarter, and fourth quarter 2020 Adjusted Earnings Per Diluted Share (a non-GAAP measure) was $1.06 compared to $0.57 for the fourth quarter of 2019. Adjusted earnings per diluted share for the fourth quarter of 2020 included the partial release of the valuation allowance of $19.6 million.
Net sales increased $5.1 million, or 0.5%, to $1,098 million in 2020 from $1,093 million in 2019, which includes a $10.4 million increase in non-comparable store net sales partially offset by a decrease of $5.3 million, or 0.5%, in comparable store net sales. Following a 20% decrease in net sales in the second quarter due to the impact of COVID-19, the Company recovered to deliver a strong second-half performance. Net merchandise sales increased 2.0% while net services sales (install and freight) decreased 10.0% over the prior year. The Company closed nine net stores in 2020, and as of December 31, 2020, operated 410 stores.
Gross profit of $427.7 million in 2020 increased $24.0 million from 2019 and, as a percent of sales, gross margin in 2020 increased to 39.0% from 36.9% in 2019. When excluding items in the table that follows, adjusted gross profit of $426.3 million in 2020 increased $22.3 million versus 2019 and adjusted gross margin in 2020 increased to 38.8% from 37.0% in 2019. This 180-basis point improvement in adjusted gross margin was due primarily to merchandising sourcing and, to a lesser extent, cost-out efforts and selective retail price increases.
SG&A expenses of $371.4 million in 2020 decreased $15.5 million from 2019, and as a percentage of net sales, SG&A decreased to 33.8% in 2020, compared to 35.4% in 2019. When excluding items in the table that follows, adjusted SG&A of $362.7 million in 2020 decreased $16.6 million from 2019 and, as a percentage of net sales, was 33.0% in 2020, a decrease of 170 basis points from 34.7% in 2019. The decrease in adjusted SG&A was primarily due to lower advertising expense as the Company reduced its promotional cadence in response to COVID-19 and then optimized its marketing efforts, pivoting towards more efficient digital channels, as well as $2.5 million from the final settlement in 2020 of the business interruption insurance claim related to the August 2019 network security incident and lower travel and entertainment expense. These savings were partially offset by higher bonus and commission reflecting the Company’s strong financial performance, and higher benefits expense.
Operating income was $56.3 million in 2020, compared to operating income of $16.7 million in 2019. When excluding items in the table that follows, adjusted operating income was $63.6 million and adjusted operating margin was 5.8% in 2020, compared to $24.7 million, or 2.3%, in 2019. The primary driver of the increase was the Company’s execution on its profitability initiatives, which increased adjusted gross margin and reduced advertising expense.
The Company had other expense of $2.6 million and $3.8 million for the years ended December 31, 2020 and 2019, respectively. The expense in both years primarily reflected interest on borrowings on our Credit Agreement. The expense related to borrowings in 2020 was partially offset by a favorable adjustment of $1.2 million reported in the fourth quarter of 2020 for the reversal of interest expense associated with anti-dumping and countervailing duty rate changes.
Income tax benefit was $7.8 million in 2020 compared to income tax expense of $3.3 million in 2019. Excluding the partial release of the valuation allowance and CARES Act impact, income tax expense for 2020 would have been $13.6 million, which represented an effective tax rate of 25.3%.
Net income was $61.4 million, or $2.10 per diluted share, in 2020 compared to net income of $9.7 million, or $0.34 per diluted share, in 2019. Adjusted earnings per diluted share for 2020 was $2.28 compared to $0.54 for 2019. Adjusted earnings per diluted share for 2020 included the partial release of the tax valuation allowance of $19.6 million.
Cash Flow & Liquidity
As of December 31, 2020, the Company had liquidity of $213.9 million, consisting of excess availability under its Credit Agreement of $44.0 million, and cash and cash equivalents of $169.9 million. This represents an increase in liquidity of $102.9 million from December 31, 2019. In addition, the Company’s debt balance as of December 31, 2020 was $101.0 million, unchanged since amending the Credit Agreement on April 17, 2020, and up $19.0 million from December 31, 2019.
The increase in liquidity at December 31, 2020 from the year earlier was driven by improved operating performance along with disciplined working capital management, which led the Company to report Cash Flow from Operations of $157.0 million compared to $0.3 million in 2019. The working capital benefit included a 15% reduction in inventory due to strong sales and supply chain disruptions, collection of tariff receivables, further growth in customer deposits, and higher accounts payable. The accounts payable balance was higher at the end of 2020 due to the increased in-transit inventory and extended payment terms with vendors and other service providers.
Canadian and U.S. Store Closure Costs
During the third quarter of 2020, the Company conducted a comprehensive review of its real estate portfolio. Following the conclusion of this review, the Company made the decision to close its Canadian operations, including all eight stores in Canada, and six underperforming U.S. locations by the end of 2020. The Company will continue to monitor store performance on an ongoing basis. The Company incurred expense of $3.8 million to close these stores in the second half of 2020, $1.2 million of which was recorded in the fourth quarter of 2020. All 14 stores were closed by year end although certain clean-up activities will not be fully completed until early in 2021.
Section 301 Tariffs
The Company’s financial statements have been impacted by Section 301 tariffs on certain products imported from China in recent years. A subset of these imports for certain click vinyl and other engineered products (the “Subset Products”) received an exemption that was made retroactive to the beginning of the Section 301 Tariffs for a period of time. The Company has deployed strategies to mitigate tariffs and improve gross margin, including alternative country sourcing, partnering with current vendors to lower costs and introduce new products, and adjusting its pricing. Please refer to the table on page 11 of this release for a detailed timeline and tariff levels for the key events related to Section 301 Tariffs.
The Company recorded a benefit of approximately $13 million of gross profit and $11 million of operating income in the fourth quarter of 2019 as a result of the retroactive exclusion of these tariffs, which did not repeat in the fourth quarter of 2020.
During the fourth quarter of 2020, the August reinstatement of tariffs began to flow through the income statement as these products were sold. This impact was partially offset by the Company’s mitigation strategies.
The future impact of the reinstatement of tariffs is dependent on several factors including: 1) ongoing Company mitigation efforts for which the outcome is uncertain, 2) inventory turnover rates which were affected by COVID-19 in 2020, and 3) behavior of consumers and competitors as prices for products adjust based on supply/demand and as consumer preferences shift among product categories impacting both product sourcing and inventory turnover. It is still too early to predict the outcome of such measures adopted by the Company.
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.
For the full fourth quarter results, click here.
About LL Flooring
LL Flooring is one of North America’s leading specialty retailers of hard-surface flooring with 410 stores as of December 31, 2020. The Company seeks to offer the best customer experience online and in stores, with more than 400 varieties of hard-surface floors featuring a range of quality styles and on-trend designs. LL’s online tools also help empower customers to find the right solution for the space they’ve envisioned. LL Flooring’s extensive selection includes vinyl plank, solid and engineered hardwood, laminate, bamboo, porcelain tile, and cork, with a wide range of flooring enhancements and accessories to complement. Our stores are staffed with flooring experts who provide advice, pro partnership services and installation options for all of LL Flooring’s products, the majority of which is in stock and ready for delivery.
Source: Lumber Liquidators Holdings, Inc.