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    Lumber Liquidators Announces Second Quarter 2018 Financial Results

    Jul 31, 2018

    TOANO, Va., July 31, 2018 /PRNewswire/ -- Lumber Liquidators (NYSE: LL), the largest specialty retailer of hardwood flooring in North America, today announced financial results for the second quarter and six months ended June 30, 2018.

    Second Quarter Results

    Net sales for the second quarter of 2018 increased $20 million, or 7.6%, to $283.5 million from $263.5 million in the second quarter of 2017.  Net sales in comparable stores increased $12.3 million, or 4.7%, driven by a 4.6% increase in the average sale and by a 0.1% increase in the number of customers invoiced.  Merchandise sales in comparable stores grew 0.9% over the same quarter in the prior year.  Net sales in non-comparable stores increased $7.7 million.  The Company opened eight new stores during the second quarter of 2018, bringing the total store count to 406 as of June 30, 2018.

    Gross profit increased 4% in the second quarter of 2018 to $101.3 million from $97.5 million in the comparable period in 2017.  Gross margin decreased to 35.7% in the second quarter of 2018 from 37% in the second quarter of 2017.  Gross margin was favorably impacted by revisions to antidumping rates, which generated income of $2.1 million and $2.8 million for the three months ended June 30, 2018 and 2017, respectively.  During the second quarter of 2017, gross margin was also favorably impacted by a reduction of $1 million in the reserve for the Company's Air Quality Testing Program.  Excluding the items shown in the attached supplemental schedule, Adjusted Gross Margin (a non-GAAP measure) was 35% and 35.5% for the three months ended June 30, 2018 and 2017, respectively.  This decline of 50 basis points from 2017 was due to increased transportation costs, increased costs related to inventory obsolescence, and an increased mix of installation sales, which carry lower gross margins, and increased promotion of selected categories.  This was partially offset by a higher mix of manufactured products, particularly engineered vinyl plank, which carry above average gross margins.

    Selling, general and administrative ("SG&A") expenses increased in the second quarter of 2018 to $102.2 million from $92.3 million in the comparable period in 2017.  The increase in SG&A was in part attributable to legal settlements, as well as incremental legal and professional fees, of approximately $6.0 million and $3.5 million for the three months ended June 30, 2018 and 2017, respectively.  Excluding the items shown in the attached supplemental schedule, Adjusted SG&A (a non-GAAP measure) was $96.2 million and $88.8 million for the three months ended June 30, 2018 and 2017, respectively. This $7.4 million increase was primarily driven by increases in payroll, advertising, and other operating expenses including occupancy, credit card fees and depreciation, most of which reflect the impact of opening 21 new stores since June 30, 2017.

    Operating loss for the three months ended June 30, 2018 was ($0.9 million) compared to operating income of $5.1 million in the comparable period in 2017.  Excluding the items shown in the attached supplemental schedule, Adjusted Operating Income (a non-GAAP measure) was $3.0 million and $4.9 million for the three months ended June 30, 2018 and 2017, respectively.

    Net loss for the three months ended June 30, 2018 was $1.5 million, or $0.05 per diluted share, compared to net income of $4.5 million, or $0.16 per diluted share, for the three months ended June 30, 2017.

    At June 30, 2018, the Company had approximately $120 million in liquidity, comprised of cash and cash equivalents and availability under its revolving credit facility.  The Company had $35 million outstanding on its revolving credit facility at June 30, 2018, compared to $15 million at December 31, 2017.

    Dennis Knowles, Chief Executive Officer, commented, "During the second quarter, we were pleased with our topline revenue growth, as well as the continued strong installation expansion and opening of eight new stores.  In addition, with the appointment of Jennifer Bohaty as Chief Ethics and Compliance Officer and Charles Tyson as Chief Customer Experience Officer, we have truly transformed the leadership of the Company over the past two years.  In that time we have recruited eight new, accomplished professionals to lead the most critical functions of our Company.  We believe this leadership is well on its way to building a sustainable, customer-focused and growing company for the long term."

    2018 Outlook

    The Company reaffirmed its full-year 2018 expectations as follows:

    Total revenue growth


    Mid-to-upper single digits

    Comp store sales growth


    Mid-single digits

    Adjusted operating profit margin (a non-GAAP measure)


    Low-to-mid single digits (2% - 3%)

    Store openings


    20 - 25

    Capital spending


    $15 million to $20 million




    Exit of Finishing Operation / Equipment Purchase Agreement and Vendor Partner Agreement

    The Company recently conducted a comprehensive internal review of its Bellawood™ products finishing lines, which currently employ approximately 45 people and is located in the corporate headquarters in Toano, Virginia.  Based on this internal review, the Company is exiting this finishing operation and focusing on its core competencies in merchandising, retail operations and the customer experience.  To facilitate this change, on July 26, 2018, the Company entered into an equipment purchase agreement pursuant to which the Company will sell its finishing lines and related equipment to an unaffiliated third party.  The proceeds from this sale are expected to be approximately $1.8 million.  The Company also expects to recognize an impairment of approximately $2 million in the third quarter of 2018.  The Company has also entered into an agreement with the purchaser in which the purchaser has agreed to sell finished products and provide certain services to the Company.  This agreement will represent approximately one quarter (25%) of the unit production previously handled in the Toano facility, with the balance being supplied by other third party, unaffiliated vendors.  The Bellawood™ brand and quality standard will continue and the Company will retain all ownership and rights of use and registration for the Bellawood trademark.

    Please refer to the Company's Current Report on Form 8-K filed on July 31, 2018 for more information.

    Headquarters Relocation

    The Company currently leases approximately 315,000 square feet of combined production, warehouse and office space in Toano, VA that serves both as its corporate headquarters and houses the Company's finishing operation.  The current lease expires at December 31, 2019.  On July 31, 2018, the Company announced that it will relocate its corporate headquarters and call center from Toano, Virginia to Richmond, Virginia.  In connection with the relocation, the Company has signed a letter of intent and expects to consummate a lease for an existing building with approximately 52,900 square feet of office space, which will become the Company's new corporate headquarters and will house approximately 200 employees.  The term of the lease is expected to be 123 months, commencing on or about October 1, 2019, with two renewal options of five years each.

    Mr. Knowles concluded, "The Toano / Williamsburg community has been a very supportive home for Lumber Liquidators during our 15 years here, and we will miss the community as we move a few miles west.  At the same time, with a growing business and new leadership team focused on product innovation, core retail operations and the customer experience, it is the right time for us to relocate to a smaller facility in a metropolitan environment.  We look forward to expanding our presence in the city of Richmond and Henrico County, and benefitting from bringing the corporate team together in one location.  We are excited about the future of the Company and the benefits that these changes will bring to our shareholders and our employees.  We, as always, remain focused on our customers throughout the buying process from inspiration to installation."

    Please refer to the Company's Current Report on Form 8-K filed on July 31, 2018 for more information.

    Conference Call and Webcast Information

    The Company plans to host a conference call and audio webcast on July 31, 2018, at 8:00 a.m. Eastern Time.  The conference may be accessed by dialing (877) 407-9039 or (201) 689-8470.  A replay will be available approximately two hours after the call ends through August 7, 2018 and may be accessed by dialing (844) 512-2921 or (412) 317-6671 and entering pin number 13681169.  The live conference call and replay can also be accessed via audio webcast at the Investor Relations section of the Company's website, www.LumberLiquidators.com.

    About Lumber Liquidators

    With over 400 locations, Lumber Liquidators is North America's largest specialty retailer of hardwood flooring.  The Company features more than 400 top quality flooring varieties, including solid and engineered hardwood, bamboo, cork, laminate, resilient vinyl and wood-look ceramic tile.  Additionally, Lumber Liquidators provides a wide selection of flooring enhancements and accessories to complement, install and maintain your new floor.  Every location is staffed with flooring experts who can provide advice and useful information about Lumber Liquidators' low priced product, much of which is in stock and ready for delivery.

    With premier brands including Bellawood and Morning Star Bamboo, Lumber Liquidators' flooring is often featured on popular television shows such as HGTV's Dream Home and This Old House.  For more information, please visit www.LumberLiquidators.com or call 1.800.HARDWOOD.

    Lumber Liquidators aims to be the industry leader in sustainability.  For more information, please visit www.LumberLiquidators.com/Sustainability.  Learn more about our corporate giving program at LayItForward.LumberLiquidators.com.  You can also follow the Company on Facebook and Twitter.

    CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    This press release includes "forward-looking" statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described.  Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct.  Our actual results could be materially different from and worse than our expectations.  With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995.  These risks include, without limitation, the impact on us of any of the following:

    • government investigations and related legal proceedings;
    • other current and former legal proceedings;
    • obligations under various settlement agreements and other compliance matters;
    • impact of liquidity in the settlement of legal proceedings;
    • new laws and regulations;
    • impact of the Tax Act;
    • maintenance of valuation allowances on deferred tax assets and the impacts thereof;
    • the inability to open new stores;
    • capital expenditures;
    • funding of the remaining portion of the MDL obligation;
    • managing growth;
    • increased transportation costs;
    • damage to our assets;
    • disruption in our ability to finish and distribute our products;
    • disruptions related to our corporate headquarters relocation;
    • operating stores in Canada and an office in China;
    • managing third-party installers and product delivery companies;
    • renewing store or warehouse leases;
    • having sufficient suppliers;
    • disruption in our ability to obtain products from our suppliers;
    • our, and our suppliers', compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level;
    • product liability claims;
    • obtaining products from abroad, including the effects of tariffs, as well as the effects of antidumping and countervailing duties;
    • availability of suitable hardwood;
    • changes in economic conditions, both domestic and abroad;
    • sufficient insurance coverage;
    • access to capital;
    • disruption due to cybersecurity threats;
    • handling of confidential customer information;
    • management information systems disruptions;
    • alternative e-commerce offerings;
    • our advertising strategy;
    • anticipating consumer trends;
    • competition;
    • internal controls;
    • impact of changes in accounting guidance;
    • stock price volatility; and
    • anti-takeover provisions.

    The Company specifically disclaims any obligation to update these statements, which speak only as of the dates on which such statements are made, except as may be required under the federal securities laws.  Information regarding these and other additional risks and uncertainties is contained in the Company's other reports filed with the Securities and Exchange Commission, including the Item 1A, "Risk Factors," section of the Form 10-K for the year ended December 31, 2017.

    Non-GAAP and Other Information

    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 as a percentage of sales; (iii) Adjusted SG&A; (iv) Adjusted SG&A as a percentage of sales; (v) Adjusted Operating Income (Loss) and (vi) Adjusted Operating Margin as a percentage of sales.  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 Adjusted Operating Profit margin items guidance cannot be reconciled to GAAP guidance without unreasonable effort because we are unable to accurately forecast the impact of legacy legal and unusual items on operating profit.

    The non-GAAP financial measures are presented because management uses these non-GAAP financial measures to evaluate the Company's operating performance and to determine incentive compensation.  Therefore, the Company believes that the presentation of non-GAAP financial measures provides useful supplementary information to, and facilitates additional analysis by, investors.  The presented non-GAAP financial measures exclude items that management does not believe reflect the Company's core operating performance, which include regulatory and legal settlements and associated legal and operating costs, changes in antidumping and countervailing duties, as such items are outside the control of the Company or are due to their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.

    For further information contact:

    Lumber Liquidators Investor Relations
    Steve Calk or Jackie Marcus
    Tel: 757.566.7512

    (Tables Follow)

     

     

    Lumber Liquidators Holdings, Inc.

    Condensed Consolidated Balance Sheets

    (Unaudited, in thousands)











    June 30,


    December 31,




    2018


    2017


    Assets








    Current Assets:








    Cash and Cash Equivalents


    $

    11,122


    $

    19,938


    Merchandise Inventories



    296,798



    262,280


    Prepaid Expenses



    8,689



    9,108


    Other Current Assets



    10,152



    6,670


    Total Current Assets



    326,761



    297,996


    Property and Equipment, net



    98,094



    100,491


    Goodwill



    9,693



    9,693


    Other Assets



    3,754



    2,615


    Total Assets


    $

    438,302


    $

    410,795










    Liabilities and Stockholders' Equity








    Current Liabilities:








    Accounts Payable


    $

    73,385


    $

    67,676


    Customer Deposits and Store Credits



    45,347



    38,546


    Accrued Compensation



    8,670



    12,101


    Sales and Income Tax Liabilities



    4,473



    4,273


    Accrual for Multidistrict Litigations ("MDL") and Related Laminate Matters



    38,240



    36,960


    Other Current Liabilities



    18,298



    18,605


    Total Current Liabilities



    188,413



    178,161


    Other Long-Term Liabilities



    18,916



    19,787


    Revolving Credit Facility



    35,000



    15,000


    Total Liabilities



    242,329



    212,948










    Stockholders' Equity:








    Common Stock ($0.001 par value; 35,000 shares authorized; 31,486 and 31,397 shares issued and 28,551 and 28,490 shares outstanding, respectively)



    31



    31


    Treasury Stock, at cost (2,935 and 2,907 shares, respectively)



    (141,542)



    (140,875)


    Additional Paid-in Capital



    210,953



    208,629


    Retained Earnings



    127,788



    131,214


    Accumulated Other Comprehensive Loss



    (1,257)



    (1,152)


    Total Stockholders' Equity



    195,973



    197,847


    Total Liabilities and Stockholders' Equity


    $

    438,302


    $

    410,795


     

     

    Lumber Liquidators Holdings, Inc.

    Condensed Consolidated Statements of Operations

    (Unaudited, in thousands, except per share amounts)

















    Three Months Ended


    Six Months Ended




    June 30,


    June 30,












    2018


    2017


    2018


    2017
















    Net Sales


    $

    283,474


    $

    263,500


    $

    545,246


    $

    511,889


    Cost of Sales



    182,164



    166,044



    348,964



    327,634


    Gross Profit



    101,310



    97,456



    196,282



    184,255


    Selling, General and Administrative Expenses



    102,223



    92,336



    198,641



    204,550


    Operating (Loss) Income



    (913)



    5,120



    (2,359)



    (20,295)


    Other Expense



    346



    516



    667



    1,028


    (Loss) Income Before Income Taxes



    (1,259)



    4,604



    (3,026)



    (21,323)


    Income Tax Expense



    195



    129



    400



    574


    Net (Loss) Income


    $

    (1,454)


    $

    4,475


    $

    (3,426)


    $

    (21,897)


    Net (Loss) Income per Common Share—Basic


    $

    (0.05)


    $

    0.16


    $

    (0.12)


    $

    (0.77)


    Net (Loss) Income per Common Share—Diluted


    $

    (0.05)


    $

    0.16


    $

    (0.12)


    $

    (0.77)


    Weighted Average Common Shares Outstanding:














    Basic



    28,546



    28,394



    28,527



    28,342


    Diluted



    28,546



    28,697



    28,527



    28,342


     

     

    Lumber Liquidators Holdings, Inc.

    Condensed Consolidated Statements of Cash Flows

    (Unaudited, in thousands)










    Six Months Ended



    June 30,



    2018


    2017

    Cash Flows from Operating Activities:







    Net Loss


    $

    (3,426)


    $

    (21,897)

    Adjustments to Reconcile Net Loss:







    Depreciation and Amortization



    9,567



    8,716

    Stock-based Compensation Expense



    2,123



    2,469

    Loss on Disposal of Fixed Assets



    23



    Changes in Operating Assets and Liabilities:







    Merchandise Inventories



    (38,648)



    25,942

    Accounts Payable



    5,034



    (51,601)

    Customer Deposits and Store Credits



    6,925



    5,617

    Prepaid Expenses and Other Current Assets



    307



    3,110

    Accrual for MDL and Related Laminate Matters



    2,951



    18,000

    Other Assets and Liabilities



    (6,386)



    (7,112)

    Net Cash Used in Operating Activities



    (21,530)



    (16,756)

    Cash Flows from Investing Activities:







    Purchases of Property and Equipment



    (6,584)



    (3,847)

    Other Investing Activities



    28



    250

    Net Cash Used in Investing Activities



    (6,556)



    (3,597)

    Cash Flows from Financing Activities:







    Borrowings on Revolving Credit Facility



    29,000



    35,000

    Payments on Revolving Credit Facility



    (9,000)



    (18,000)

    Payments on Capital Lease Obligations





    (237)

    Payments on Financed Insurance Obligations



    (612)



    Other Financing Activities



    (587)



    321

    Net Cash Provided by Financing Activities



    18,801



    17,084

    Effect of Exchange Rates on Cash and Cash Equivalents



    469



    637

    Net Decrease in Cash and Cash Equivalents



    (8,816)



    (2,632)

    Cash and Cash Equivalents, Beginning of Period



    19,938



    10,271

    Cash and Cash Equivalents, End of Period


    $

    11,122


    $

    7,639








    Supplemental disclosure of non-cash operating and financing activities:







    Financed Insurance Premiums


    $


    $

    1,346








     

     

    Lumber Liquidators Holdings, Inc.

    GAAP to Non-GAAP Reconciliation

    (in thousands, except percentages)


    Items impacting gross margin with comparisons to the prior-year periods include:



















    Three Months Ended
    June 30,


    Six Months Ended
    June 30,


    2018


    2017


    2018


    2017



    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales



    (dollars in thousands)



    (dollars in thousands)

    Gross Profit/Margin, as reported (GAAP)

    $

    101,310

    35.7%


    $

    97,456

    37.0%


    $

    196,282

    36.0%


    $

    184,255

    36.0%

















    Antidumping Income 1


    (2,126)

    (0.7)%



    (2,797)

    (1.1)%



    (2,126)

    (0.4)%



    (2,797)

    (0.5)%

    Indoor Air Quality Testing Program Income 2




    (993)

    (0.4)%





    (993)

    (0.2)%

      Total


    (2,126)

    (0.7)%



    (3,790)

    (1.5)%



    (2,126)

    (0.4)%



    (3,790)

    (0.7)%

















    Adjusted Gross Profit/Margin, (a non-GAAP measure)

    $

    99,184

    35.0%


    $

    93,666

    35.5%


    $

    194,156

    35.6%


    $

    180,465

    35.3%

















    1 We recognized countervailing and antidumping income of $2.1 million and $2.8 million associated with applicable prior-year shipments of engineered hardwood from China for the three and six months ended June 30, 2018 and 2017, respectively.

    2 In the second quarter 2017, we reduced the reserve that had been established in a prior period for estimated costs to be incurred related to our indoor air quality testing program by approximately $1 million.  This reserve was recorded in other current liabilities in the condensed consolidated balance sheet.


















    Items impacting SG&A with comparisons to the prior-year periods include:



















    Three Months Ended
    June 30,


    Six Months Ended
    June 30,


    2018


    2017

    2018


    2017



    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales



    (dollars in thousands)



    (dollars in thousands)

    SG&A, as reported (GAAP)

    $

    102,223

    36.1%


    $

    92,336

    35.0%


    $

    198,641

    36.4%


    $

    204,550

    40.0%

















    Accrual for MDLs and Related Laminate Matters 1


    2,701

    1.0%





    2,951

    0.5%



    18,000

    3.5%

    Legal and Professional Fees 2


    3,325

    1.2%



    3,526

    1.3%



    6,391

    1.2%



    5,934

    1.2%

      Sub-Total Items above


    6,026

    2.2%



    3,526

    1.3%



    9,342

    1.7%



    23,934

    4.7%

















    Adjusted SG&A, (a non-GAAP measure)

    $

    96,197

    33.9%


    $

    88,810

    33.7%


    $

    189,299

    34.7%


    $

    180,616

    35.3%

















    1 This amount represents the charge to earnings in 2017 related to the Formaldehyde MDL and Abrasion MDL settlements and charges for certain Related Laminate Matters in 2018.

    2 Represents charges to earnings related to our defense of certain significant legal actions during the period.  This does not include all legal costs incurred by the Company.


















    Items impacting operating income (loss) with comparisons to the prior-year periods include:





















    Three Months Ended
    June 30,


    Six Months Ended
    June 30,



    2018


    2017

    2018


    2017




    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales




    (dollars in thousands)



    (dollars in thousands)


    Operating (Loss) Income, as reported (GAAP)

    $

    (913)

    (0.3)%


    $

    5,120

    1.9%


    $

    (2,359)

    (0.4)%


    $

    (20,295)

    (4.0)%



















    Gross Margin Items:

















    Antidumping Income 1


    (2,126)

    (0.7)%



    (2,797)

    (1.1)%



    (2,126)

    (0.4)%



    (2,797)

    (0.5)%


    Indoor Air Quality Testing Program Income 2




    (993)

    (0.4)%





    (993)

    (0.2)%


    Gross Margin Subtotal


    (2,126)

    (0.7)%



    (3,790)

    (1.5)%



    (2,126)

    (0.4)%



    (3,790)

    (0.7)%



















    SG&A Items:

















    Accrual for MDLs and Related Laminate Matters 3


    2,701

    1.0%





    2,951

    0.5%



    18,000

    3.5%


    Legal and Professional Fees 4


    3,325

    1.2%



    3,526

    1.3%



    6,391

    1.2%



    5,934

    1.2%


    SG&A Subtotal


    6,026

    2.2%



    3,526

    1.3%



    9,342

    1.7%



    23,934

    4.7%



















    Adjusted Operating Income (Loss) (a non-GAAP measure)

    $

    2,987

    1.2%


    $

    4,856

    1.8%


    $

    4,857

    0.9%


    $

    (151)

    0.0%



















    1,2 See the Gross Margin section above for more detailed explanations of these individual items.

    3,4 See the SG&A section above for more detailed explanations of these individual items.


















     

     

    SOURCE Lumber Liquidators


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