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    Lumber Liquidators Announces Third Quarter 2018 Financial Results

    Oct 30, 2018

    TOANO, Va., Oct. 30, 2018 /PRNewswire/ -- Lumber Liquidators (NYSE: LL), a leading specialty retailer of hard-surface flooring in North America, today announced financial results for the third quarter and nine months ended September 30, 2018.

    (PRNewsfoto/Lumber Liquidators)

    Third Quarter Results

    Net sales for the third quarter of 2018 increased $13.3 million, or 5.2%, to $270.5 million from $257.2 million in the third quarter of 2017.  Net sales in comparable stores increased $5.3 million, or 2.1%, driven by the expansion of installation services, whose sale in comparable stores was up 39%, which more than offset a 1.3% decline in merchandise sales.  The comparable store growth reflected a 5.5% increase in average sale, driven by both higher attachment of installation to the sale, and increased mix of pro customers that have larger purchases, and was partially offset by a 3.4% decrease in the number of transactions.  Net sales in non-comparable stores increased $8.0 million.  The Company opened three new stores during the third quarter of 2018, bringing the total store count to 409 as of September 30, 2018.

    Gross profit increased $8 million, or 8.6%, in the third quarter of 2018 to $100.7 million from $92.7 million in the comparable period in 2017.  Gross margin increased to 37.2% in the third quarter of 2018 from 36.0% in the third quarter of 2017. Gross margin was favorably impacted by revisions to antidumping rates during the third quarter of 2018.  Excluding the items shown in the attached supplemental schedule, Adjusted Gross Margin (a non-GAAP measure) was 36.2% and 36.0% for the three months ended September 30, 2018 and 2017, respectively.  This increase of 20 basis points from 2017 was due to a higher mix of manufactured products, particularly engineered vinyl plank, which carry above-average gross margins and reduced promotional activity, both of which were partially offset by increased transportation costs as well as an increased mix of installation and delivery services, which carry lower gross margins than merchandise. 

    Selling, general and administrative ("SG&A") expenses decreased $16 million, or 14.5%, in the third quarter of 2018 to $94 million from $110 million in the comparable period in 2017.  The decrease in SG&A was attributable to the absence of the $18 million accrual in the third quarter of 2017 in connection with the MDL and Abrasion MDL and other legacy legal expenses.  These items are shown in the table below.  Excluding the items shown in the attached supplemental schedule, Adjusted SG&A (a non-GAAP measure) increased $1.7 million, or 1.9%, primarily as a result of a $1 million increase in occupancy costs reflecting 22 more stores than a year ago, and modest increases in promotional financing and legal fees, offset by a $0.7 million reduction in advertising.

    Operating income for the three months ended September 30, 2018 was $6.7 million compared to an operating loss of $17.3 million in the comparable period in 2017.  Excluding the items shown in the attached supplemental schedule, Adjusted Operating Income (a non-GAAP measure) was $8.6 million, or 3.3% of sales in 2018, compared to $5.1 million, or 2.0% of sales, in 2017.

    Net income for the three months ended September 30, 2018 was $5.9 million, or $0.21 per diluted share, compared to a net loss of $18.9 million, or $0.66 per diluted share, for the three months ended September 30, 2017.  Excluding unusual items, Adjusted Net Income (a non-GAAP measure) for the three months ended September 30, 2018 was $7.9 million, or $0.27 per diluted share, compared to Adjusted Net Income of $3.5 million, or $0.12 per diluted share, for the three months ended September 30, 2017.

    At September 30, 2018, the Company had approximately $114 million in liquidity, comprised of cash and cash equivalents and availability under its revolving credit facility.  The Company had $43 million outstanding on its revolving credit facility at September 30, 2018, compared to $15 million at December 31, 2017.

    Dennis Knowles, Chief Executive Officer, commented, "During the third quarter, we grew revenue and were pleased with gross margin expansion and SG&A leverage, all of which contributed to our fifth consecutive quarter of Adjusted Net Income.  We continued our growth in installation sales and, after opening three new stores in the third quarter, we are on target to open 22 new stores in 2018.  We are pleased with the development of our management team and recent additions to both our digital and sourcing capabilities.  We are confident that our team is well-positioned to drive our business and digital strategy going forward."

    2018 Outlook

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



    Previous


    Current

    Total revenue growth


    Mid to upper
    single digits


    Mid single
    digits






    Comp store sales growth


    Mid-single
    digits


    2.5% - 3.5%






    Adjusted operating margin*


    2% - 3%


    1.6 - 2.0%






    Store openings


    20 - 25


    22






    Capital spending


    $15 - $20
    million


    $14 - $16
    million


    *Defined in table below, excludes legacy legal and other significant unusual items.

    Tariffs

    The Company sources approximately 45% of its products from China.  Virtually all of these products had a 10% tariff imposed upon them effective September 24, 2018 and many of these products are at risk to have tariffs increased to 25% as of January 1, 2019.  The Company has several approaches to address this situation including adjusting its pricing, partnering with current vendors to lower costs, and altering its supply chain to source the same or similar products from other countries at lower costs.  The Company continues to monitor market pricing and promotional strategies to inform and guide its decisions.  As the Company examines each product, it employs one or more of the above approaches in an effort to mitigate the impacts of these tariffs. 

    Conference Call and Webcast Information

    The Company plans to host a conference call and audio webcast on October 30, 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 November 6, 2018 and may be accessed by dialing (844) 512-2921 or (412) 317-6671 and entering pin number 13683365.  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 one of North America's leading specialty retailers of hard-surface flooring.  The Company features more than 400 top quality flooring varieties, including solid and engineered hardwood, bamboo, cork, laminate, resilient vinyl and porcelain 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, including tariffs;
    • maintenance of valuation allowances on deferred tax assets and the impacts thereof;
    • the inability to open new stores;
    • capital expenditures;
    • anticipating consumer trends;
    • competition;
    • internal controls;
    • funding of the remaining portion of the MDL obligation;
    • 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;
    • impact of the Tax Act;
    • product liability claims;
    • obtaining products from abroad, including the effects of tariffs, as well as the effects of antidumping and countervailing duties;
    • disruption in our ability to operate our business due to the impacts from severe weather;
    • availability of suitable hardwood;
    • changes in economic conditions, both domestic and abroad;
    • sufficient insurance coverage;
    • access to capital;
    • managing growth;
    • disruption due to cybersecurity threats;
    • handling of confidential customer information;
    • management information systems disruptions;
    • alternative e-commerce offerings;
    • our advertising strategy;
    • impact of changes in accounting guidance;
    • impact of installation revenue growth on net sales;
    • 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, and Item 1A, "Risk Factors," section of the Form 10-Q for the quarter ended September 30, 2018. 

    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; (vi) Adjusted Operating Income as a percentage of sales; (vii) Adjusted Net Income and (viii) Adjusted Net Income per 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 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)













    September 30,



    December 31,





    2018



    2017


    Assets








    Current Assets:








    Cash and Cash Equivalents


    $

    11,831


    $

    19,938


    Merchandise Inventories



    304,665



    262,280


    Prepaid Expenses



    7,809



    9,108


    Other Current Assets



    12,143



    6,670


    Total Current Assets



    336,448



    297,996


    Property and Equipment, net



    93,470



    100,491


    Goodwill



    9,693



    9,693


    Other Assets



    3,624



    2,615


    Total Assets


    $

    443,235


    $

    410,795










    Liabilities and Stockholders' Equity








    Current Liabilities:








    Accounts Payable


    $

    64,387


    $

    67,676


    Customer Deposits and Store Credits



    43,513



    38,546


    Accrued Compensation



    8,447



    12,101


    Sales and Income Tax Liabilities



    4,544



    4,273


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



    37,657



    36,960


    Other Current Liabilities



    19,330



    18,605


    Total Current Liabilities



    177,878



    178,161


    Other Long-Term Liabilities



    18,850



    19,787


    Revolving Credit Facility



    43,000



    15,000


    Total Liabilities



    239,728



    212,948










    Stockholders' Equity:








    Common Stock ($0.001 par value; 35,000 shares authorized; 31,569 and
    31,397 shares issued and 28,620 and 28,490 shares outstanding, respectively)



    32



    31


    Treasury Stock, at cost (2,949 and 2,907 shares, respectively)



    (141,808)



    (140,875)


    Additional Paid-in Capital



    212,760



    208,629


    Retained Earnings



    133,711



    131,214


    Accumulated Other Comprehensive Loss ("AOCL")



    (1,188)



    (1,152)


    Total Stockholders' Equity



    203,507



    197,847


    Total Liabilities and Stockholders' Equity


    $

    443,235


    $

    410,795


     

     

    Lumber Liquidators Holdings, Inc.

    Condensed Consolidated Statements of Operations

    (Unaudited, in thousands, except per share amounts)

















    Three Months Ended


    Nine Months Ended



    September 30,


    September 30,



    2018


    2017


    2018


    2017














    Net Sales













    Net Merchandise Sales


    $

    236,380


    $

    232,830


    $

    721,822


    $

    704,703

    Net Services Sales



    34,089



    24,355



    93,893



    64,371

    Total Net Sales



    270,469



    257,185



    815,715



    769,074

    Cost of Sales













    Cost of Merchandise Sold



    144,490



    146,458



    449,508



    442,742

    Cost of Services Sold



    25,297



    18,041



    69,243



    49,391

    Total Cost of Sales



    169,787



    164,499



    518,751



    492,133

    Gross Profit



    100,682



    92,686



    296,964



    276,941

    Selling, General and Administrative Expenses



    93,987



    109,962



    292,628



    314,512

    Operating Income (Loss)



    6,695



    (17,276)



    4,336



    (37,571)

    Other Expense



    547



    377



    1,214



    1,405

    Income (Loss) Before Income Taxes



    6,148



    (17,653)



    3,122



    (38,976)

    Income Tax Expense



    225



    1,262



    625



    1,836

    Net Income (Loss)


    $

    5,923


    $

    (18,915)


    $

    2,497


    $

    (40,812)

    Net Income (Loss) per Common Share—Basic


    $

    0.21


    $

    (0.66)


    $

    0.09


    $

    (1.44)

    Net Income (Loss) per Common Share—Diluted


    $

    0.21


    $

    (0.66)


    $

    0.09


    $

    (1.44)

    Weighted Average Common Shares Outstanding:













    Basic



    28,602



    28,454



    28,552



    28,380

    Diluted



    28,757



    28,454



    28,769



    28,380

     

     

    Lumber Liquidators Holdings, Inc.

    Condensed Consolidated Statements of Cash Flows

    (Unaudited, in thousands)










    Nine Months Ended



    September 30,



    2018


    2017

    Cash Flows from Operating Activities:







    Net Income (Loss)


    $

    2,497


    $

    (40,812)

    Adjustments to Reconcile Net Income (Loss):







    Depreciation and Amortization



    14,042



    13,038

    Stock-based Compensation Expense



    3,131



    3,563

    Impairment and Loss on Disposal of Fixed Assets



    1,812



    1,491

    Changes in Operating Assets and Liabilities:







    Merchandise Inventories



    (44,450)



    48,277

    Accounts Payable



    (3,196)



    (78,861)

    Customer Deposits and Store Credits



    5,079



    7,288

    Prepaid Expenses and Other Current Assets



    1,153



    33,144

    Accrual for MDL and Related Laminate Matters



    2,951



    36,000

    Other Assets and Liabilities



    (8,848)



    (1,882)

    Net Cash (Used in) Provided by Operating Activities



    (25,829)



    21,246

    Cash Flows from Investing Activities:







    Purchases of Property and Equipment



    (10,651)



    (5,514)

    Other Investing Activities



    553



    819

    Net Cash Used in Investing Activities



    (10,098)



    (4,695)

    Cash Flows from Financing Activities:







    Borrowings on Revolving Credit Facility



    37,000



    35,000

    Payments on Revolving Credit Facility



    (9,000)



    (43,000)

    Payments on Capital Lease Obligations





    (351)

    Payments on Financed Insurance Obligations



    (612)



    (367)

    Other Financing Activities



    (163)



    (18)

    Net Cash Provided by (Used in) Financing Activities



    27,225



    (8,736)

    Effect of Exchange Rates on Cash and Cash Equivalents



    595



    771

    Net (Decrease) Increase in Cash and Cash Equivalents



    (8,107)



    8,586

    Cash and Cash Equivalents, Beginning of Period



    19,938



    10,271

    Cash and Cash Equivalents, End of Period


    $

    11,831


    $

    18,857








    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

    September 30,


    Nine Months Ended

    September 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)

    $

    100,682

    37.2%


    $

    92,686

    36.0%


    $

    296,964

    36.4%


    $

    276,941

    36.0%

















    Antidumping Income 1


    (2,822)

    (1.0)%





    (4,948)

    (0.6)%



    (2,797)

    (0.4)%

    Indoor Air Quality Testing Program Income 2








    (993)

    (0.1)%

      Total


    (2,822)

    (1.0)%





    (4,948)

    (0.6)%



    (3,790)

    (0.5)%

















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

    $

    97,860

    36.2%


    $

    92,686

    36.0%


    $

    292,016

    35.8%


    $

    273,151

    35.5%

















    1 The Company recognized countervailing and antidumping income of $2.8 million and $4.9 million associated with applicable prior-year shipments of engineered hardwood from China for the three and nine months ended September 30, 2018, respectively, and $2.8 million of income for the nine months ended September 30, 2017.

    2 In the second quarter 2017, the Company reduced the reserve that had been established in a prior period for estimated costs to be incurred related to its 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

    September 30,


    Nine Months Ended

    September 30,


    2018


    2017

    2018


    2017



    $

    % of Sales



    $

    % of Sales



    $

    % of Sales



    $

    % of Sales



    (dollars in thousands)



    (dollars in thousands)

    SG&A, as reported (GAAP)

    $

    93,987

    34.7%


    $

    109,962

    42.8%


    $

    292,628

    35.9%


    $

    314,512

    40.9%

















    Accrual for MDLs and Related Laminate Matters 1




    18,000

    7.0%



    2,951

    0.4%



    36,000

    4.7%

    Legal and Professional Fees 2


    2,991

    1.1%



    2,940

    1.1%



    9,382

    1.2%



    8,874

    1.2%

    All Other 3


    1,769

    0.7%



    1,459

    0.6%



    1,769

    0.2%



    1,459

    0.1%

      Sub-Total Items above


    4,760

    1.8%



    22,399

    8.7%



    14,102

    1.8%



    46,333

    6.0%

















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

    $

    89,227

    32.9%


    $

    87,563

    34.1%


    $

    278,526

    34.1%


    $

    268,179

    34.9%

















    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, which is described more fully in Note 6 to the condensed consolidated financial statements.

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

    3 All Other in 2018 represents an impairment of certain assets related to the Company's decision to exit the finishing business; in 2017, All Other represents an impairment of certain assets related to a vertical integration initiative the Company has discontinued.

     

     

    Lumber Liquidators Holdings, Inc.

    GAAP to Non-GAAP Reconciliation - continued

    (in thousands, except percentages and per share amounts)


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



    Three Months Ended

    September 30,


    Nine Months Ended

    September 30,


    2018


    2017

    2018


    2017



    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales



    $

    % of
    Sales



    (dollars in thousands)



    (dollars in thousands)

    Operating Income (Loss), as reported (GAAP)

    $

    6,695

    2.5%


    $

    (17,276)

    (6.7)%


    $

    4,336

    0.5%


    $

    (37,571)

    (4.9)%

















    Gross Margin Items:
















    Antidumping Income 1


    (2,822)

    (1.0)%





    (4,948)

    (0.6)%



    (2,797)

    (0.4)%

    Indoor Air Quality Testing Program Income 2








    (993)

    (0.1)%

    Gross Margin Subtotal


    (2,822)

    (1.0)%





    (4,948)

    (0.6)%



    (3,790)

    (0.5)%

















    SG&A Items:
















    Accrual for MDLs and Related Laminate Matters 3




    18,000

    7.0%



    2,951

    0.4%



    36,000

    4.7%

    Legal and Professional Fees 4


    2,991

    1.1%



    2,940

    1.1%



    9,382

    1.2%



    8,874

    1.2%

    All Other 5


    1,769

    0.7%



    1,459

    0.6%



    1,769

    0.2%



    1,459

    0.1%

    SG&A Subtotal


    4,760

    1.8%



    22,399

    8.7%



    14,102

    1.8%



    46,333

    6.0%

















    Adjusted Operating Income (a non-GAAP measure)

    $

    8,633

    3.3%


    $

    5,123

    2.0%


    $

    13,490

    1.7%


    $

    4,972

    0.6%

















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

    3,4,5 See the SG&A section above for more detailed explanations of these individual items.

     

    Items impacting net income (loss) and net income (loss) per diluted share with comparisons to the prior-year periods include:



    Three Months Ended


    Nine Months Ended



    September 30,


    September 30,



    2018


    2017


    2018


    2017




    (dollars in thousands, except per share amounts)

    Net Income (Loss)


    $

    5,923


    $

    (18,915)


    $

    2,497


    $

    (40,812)

    Net Income (Loss) per Diluted Share


    $

    0.21


    $

    (0.66)


    $

    0.09


    $

    (1.44)

    Weighted Average Common Shares Outstanding, Diluted:



    28,757



    28,454



    28,769



    28,380














    Gross Margin Items:













    Antidumping Income1


    $

    (2,822)


    $


    $

    (4,948)


    $

    (2,797)

    Indoor Air Quality Testing Program Income2









    (993)

    Gross Margin Subtotal



    (2,822)





    (4,948)



    (3,790)














    SG&A Items:













    Accrual for MDLs and Related Laminate Matters3





    18,000



    2,951



    36,000

    Legal and Professional Fees4



    2,991



    2,940



    9,382



    8,874

    All Other5



    1,769



    1,459



    1,769



    1,459

    SG&A Subtotal



    4,760



    22,399



    14,102



    46,333














    Tax Impact of Adjustments to Net Income (Loss)6









    Adjusted Net Income (a non-GAAP measure)


    $

    7,861


    $

    3,484


    $

    11,651


    $

    1,731

    Adjusted Net Income per Diluted Share (a non-GAAP
    measure)


    $

    0.27


    $

    0.12


    $

    0.41


    $

    0.06














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

    3,4, 5 See the SG&A section above for more detailed explanations of these individual items.

    6 The Company considered the tax impact related to the pre-tax adjustments above.  The Company has a full valuation allowance recorded against its net deferred tax assets, which effectively offsets its federal taxes.  Therefore, the Company did not identify any tax impact due to these adjustments.

     

    SOURCE Lumber Liquidators


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