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    Lumber Liquidators Announces Third Quarter 2019 Financial Results

    Reported Results Include Impact of August Network Security Incident; Insurance Recovery Process Ongoing

    Nov 6, 2019

    TOANO, Va., Nov. 6, 2019 /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, 2019.

    "We had a challenging quarter that included soft demand in July as well as a network security incident in August, but despite these headwinds, we made solid progress during the quarter implementing our strategic initiatives, including actions to mitigate the impact of tariffs," said Chief Executive Officer Dennis Knowles.  "We continue to work hard to evolve our business to better serve customers and build on our unique value proposition. During the quarter, we continued to leverage enhanced visual selling tools that we believe resonate with consumers as we guide them along their flooring project journey. This has been supported by a robust marketing strategy, including the launch of a new advertising campaign in mid-September 2019 that highlights our differentiated service and quality products while also emphasizing the great value we offer consumers."

    "Looking ahead, we are lowering our full-year 2019 sales and operating margin guidance to reflect our weaker-than-expected third quarter results that included the impact of the network security incident," Knowles continued.  "Encouragingly, we had positive comparable store sales in October as we completed a successful October Yard Sale, our premier fourth-quarter promotion, and we see a generally more supportive macro environment as housing turnover strengthens, home equity levels continue to rise, mortgage rates tick lower and employment remains strong, nevertheless we feel it is prudent to lower our annual guidance at this time.  We remain focused on executing our transformation plan to better position us to serve both retail and professional flooring consumers and create long-term value for our shareholders."

    Third Quarter Results

    Net sales for the third quarter of 2019 decreased $6.5 million, or 2.4%, to $264 million as compared to the third quarter of 2018.  Net sales in comparable stores decreased 3.6% as compared to the third quarter of 2018 driven by soft sales at the beginning of the quarter and compounded by a network security incident in late August discussed in the "Network Security Incident" section that follows.   However, comparable store sales showed significant improvement in the month of September driven by growth in transaction count and higher average ticket. The Company opened four new stores and relocated one store in the third quarter of 2019.

    Gross profit decreased 5% in the third quarter of 2019 to $96 million as compared to $101 million in the comparable period in 2018. Gross margin decreased to 36.2% in the third quarter of 2019 from 37.2% in the third quarter of 2018.  Both years were impacted by antidumping rate changes but in opposite directions. Excluding these items as shown on the table that follows, adjusted gross profit (a non-GAAP measure) decreased by $1.4 million and adjusted gross margin (a non-GAAP measure) improved to 36.5% from 36.2% in the third quarter of 2018. The margin increase was driven by a larger mix of higher margin manufactured products, reduced discounting in the stores, merchandising cost-out efforts, including shifting production to lower-cost countries of supply, and retail price increases related to tariff mitigation. The improvement in adjusted gross margin was achieved despite higher tariff-related costs and with an increased mix of lower margin installation sales. 

    Selling, general and administrative ("SG&A") expenses decreased 0.5% in the third quarter of 2019 to $93 million from $94 million in the comparable period in 2018 but included certain costs in both years related to investigations and lawsuits and a $1.8 million impairment of certain assets related to the Company's decision to exit the hardwood flooring finishing business in the third quarter of 2018.  Excluding these items as shown in the table that follows, adjusted SG&A (a non-GAAP measure) increased $3.9 million primarily as a result of costs related to ten new stores compared to the third quarter a year ago, higher year-over-year incentive and equity accruals driven by a reduction in last year's third quarter to align with lower performance expectations, severance, and costs related to the corporate headquarters relocation occurring in this year's fourth quarter.

    Operating income was $2.2 million and $6.7 million for the three months ended September 30, 2019 and 2018, respectively. Excluding the gross profit and SG&A items discussed above and summarized in the table that follows, adjusted operating income (a non-GAAP measure) was $3.4 million for the third quarter of 2019, down from $8.6 million for the third quarter of 2018.  The most significant drivers of the decrease were higher adjusted SG&A in this year's third quarter in addition to the impact of the network security incident in August 2019 and soft sales in July 2019.

    Net income for the three months ended September 30, 2019 was $1 million, or $0.04 per diluted share, compared to net income of $5.9 million, or $0.21 per diluted share, for the three months ended September 30, 2018.  Adjusted net income and adjusted EPS (non-GAAP measures) for the three months ended September 30, 2019 were $2.2 million and $0.08 per diluted share, compared to $7.9 million and $0.27 per diluted share, for the three months ended September 30, 2018.

    As of September 30, 2019, the Company had $64.5 million outstanding under its revolver and $25 million outstanding under its FILO Term Loan, which collectively, is unchanged from the end of the second quarter. Considering these borrowings, at September 30, 2019, the Company had $114 million in liquidity, comprised of $6 million of cash and cash equivalents and availability under the Credit Agreement of $108 million.

    Network Security Incident

    In August 2019, the Company experienced a network security incident caused by malware that encrypted certain information technology systems and impacted the ability to electronically process transactions.  Stores remained open during the event and executed the Company's business continuity plan which included utilization of manual processes to transact sales and serve customers. While it is challenging to know the precise impact, the Company estimates the disruption caused by the event negatively impacted total revenue in the range of approximately $6 million to $8 million.  Since SG&A, net of insurance proceeds, was not materially impacted by the event, the Company estimates the revenue impact flowed-through to operating income at approximately the Company's gross margin rate.  The Company maintains cybersecurity and other insurance coverage and has been working collaboratively with its insurers throughout the incident and recovery process.  Certain direct expenses related to the incident have been reimbursed and a receivable has been recorded in association with other reimbursable expenses.  In addition, the Company is pursuing a recovery of lost profit under the business interruption portion of its policies, although recovery is not guaranteed.

    Commenting on the network security incident, Mr. Knowles stated "I was extremely appreciative of employees' cross functional effort to lessen the impact of the network event, and I would like to thank everyone for their tremendous efforts. I would also like to thank our customers for their patience and understanding as our teams worked diligently to effectively serve them during the event.  Importantly, based on the results of the forensic IT analysis, there has been no evidence that any confidential customer, employee or company data was compromised or extracted."

    Appointment of Chief Financial Officer

    As announced on August 19, 2019, Nancy A. Walsh has been appointed the Company's Chief Financial Officer, effective September 9, 2019.  Ms. Walsh brings over 30 years of public company finance and capital markets experience, a deep background in financial planning and operational management, and extensive knowledge of the retail industry.  She most recently served as Executive Vice President and Chief Financial Officer of Pier 1 Imports, Inc. Prior to that, she served as Executive Vice President and Chief Financial Officer of The Bon-Ton Stores, Inc. and in various finance and leadership positions with Tapestry, Inc., formerly known as Coach, Inc.

    2019 Outlook

    The Company's current 2019 full-year outlook assumes the continuation of the current 25% tariff applicable to products imported from China for the balance of 2019 and is as follows:


    Current Outlook

    Previous Outlook

    Total revenue growth percentage

    Flat to slightly positive

    Low single digits

    Comparable store sales

    -2.0% to flat

    Approximately flat

    Adjusted operating margin (a non-GAAP measure)

    1.0% to 1.4%

    1.4% to 1.9%

    New store openings

    Approximately 11

    10 to 15

    Capital spending

    $15 to $17 million

    $15 to $18 million

    Conference Call and Webcast Information

    The Company plans to host a conference call and audio webcast on November 6, 2019, 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 13, 2019 and may be accessed by dialing (844) 512-2921 or (412) 317-6671 and entering pin number 13695123. 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

    Lumber Liquidators is one of North America's leading specialty retailers of hard-surface flooring with 419 stores as of September 30, 2019.  The Company features more than 400 varieties of floors in the latest styles, including solid and engineered hardwood, bamboo, cork, laminate, waterproof vinyl plank and porcelain tile 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.

    Learn more about Lumber Liquidators:

    CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    This press release 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," "believes," "thinks," "estimates," "seeks," "predicts," "could," "projects," "potential" 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 on us of any of the following:

    • the outcomes of legal proceedings, and the related impact on liquidity;
    • reputational harm;
    • obligations related to and impacts of new laws and regulations, including pertaining to tariffs;
    • obtaining products from abroad, including the effects of tariffs, as well as the effects of antidumping and countervailing duties;
    • obligations under various settlement agreements and other compliance matters;
    • disruption due to cybersecurity threats, including any impacts from a network security incident;
    • disruptions related to our corporate headquarters relocation;
    • inability to open new stores, find suitable locations for our new store concept, and fund other capital expenditures;
    • inability to execute on our key initiatives or such key initiatives do not yield desired results;
    • managing growth;
    • transportation costs;
    • damage to our assets;
    • disruption in our ability to distribute our products;
    • 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;
    • our, and our suppliers', compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level;
    • disruption in our ability to obtain products from our suppliers;
    • product liability claims;
    • availability of suitable hardwood, including due to disruptions from the impacts of severe weather;
    • changes in economic conditions, both domestic and abroad;
    • sufficient insurance coverage, including cybersecurity insurance;
    • access to and costs of capital;
    • the handling of confidential customer information, including the impacts from the California Consumer Privacy Act;
    • management information systems disruptions;
    • alternative e-commerce offerings;
    • our advertising and overall marketing strategy;
    • anticipating consumer trends;
    • competition;
    • impact of changes in accounting guidance, including the implementation guidelines and interpretations;
    • maintenance of valuation allowances on deferred tax assets and the impacts thereof;
    • internal controls including those over tariffs;
    • 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, 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; (iii) Adjusted SG&A; (iv) Adjusted Operating (Loss) Income; (v) Adjusted Operating Margin; (vi) Adjusted Net Income; and (vii) Adjusted EPS.  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 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
    ir@lumberliquidators.com  
    Tel: 757.566.7512

    (Tables Follow)

     

     

    Lumber Liquidators Holdings, Inc.

    Condensed Consolidated Balance Sheets

    (Unaudited, in thousands)




    September 30,


    December 31, 



    2019


    2018

    Assets






    Current Assets:







    Cash and Cash Equivalents


    $

    5,605


    $

    11,565

    Merchandise Inventories



    306,881



    318,272

    Prepaid Expenses



    9,170



    6,299

    Deposit for Legal Settlement



    21,500



    21,500

    Other Current Assets



    9,360



    8,667

    Total Current Assets



    352,516



    366,303

    Property and Equipment, net



    94,052



    93,689

    Operating Lease Right-of-Use



    111,364



    Goodwill



    9,693



    9,693

    Other Assets



    5,724



    5,832

    Total Assets


    $

    573,349


    $

    475,517








    Liabilities and Stockholders' Equity







    Current Liabilities:







    Accounts Payable


    $

    59,200


    $

    73,412

    Customer Deposits and Store Credits



    45,036



    40,332

    Accrued Compensation



    10,870



    9,265

    Sales and Income Tax Liabilities



    4,906



    4,200

    Accrual for Legal Matters and Settlements Current



    68,475



    97,625

    Operating Lease Liabilities - Current



    30,708



    Other Current Liabilities



    18,476



    17,290

    Total Current Liabilities



    237,671



    242,124

    Other Long-Term Liabilities



    13,645



    20,203

    Operating Lease Liabilities - Long-Term



    88,103



    Deferred Tax Liability



    898



    792

    Credit Agreement



    89,500



    65,000

    Total Liabilities



    429,817



    328,119








    Stockholders' Equity:







    Common Stock ($0.001 par value; 35,000 shares authorized; 29,953 and 31,578
    shares issued and 28,710 and 28,627 shares outstanding, respectively)



    30



    32

    Treasury Stock, at cost (1,243 and 2,951 shares, respectively)



    (142,299)



    (141,828)

    Additional Capital



    217,365



    213,744

    Retained Earnings



    70,100



    76,835

    Accumulated Other Comprehensive Loss



    (1,664)



    (1,385)

    Total Stockholders' Equity



    143,532



    147,398

    Total Liabilities and Stockholders' Equity


    $

    573,349


    $

    475,517

     

     

    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,



    2019


    2018


    2019


    2018














    Net Sales 













    Net Merchandise Sales


    $

    229,241


    $

    236,380


    $

    717,799


    $

    721,822

    Net Services Sales



    34,719



    34,089



    100,949



    93,893

    Total Net Sales



    263,960



    270,469



    818,748



    815,715

    Cost of Sales 













    Cost of Merchandise Sold



    142,404



    144,490



    451,631



    449,508

    Cost of Services Sold



    25,882



    25,297



    75,345



    69,243

    Total Cost of Sales 



    168,286



    169,787



    526,976



    518,751

    Gross Profit 



    95,674



    100,682



    291,772



    296,964

    Selling, General and Administrative Expenses 



    93,495



    93,987



    294,392



    292,628

    Operating Income (Loss)



    2,179



    6,695



    (2,620)



    4,336

    Other Expense



    909



    547



    3,265



    1,214

    Income (Loss) Before Income Taxes 



    1,270



    6,148



    (5,885)



    3,122

    Income Tax Expense



    225



    225



    850



    625

    Net Income (Loss)


    $

    1,045


    $

    5,923


    $

    (6,735)


    $

    2,497

    Net Income (Loss) per Common Share—Basic 


    $

    0.04


    $

    0.21


    $

    (0.23)


    $

    0.09

    Net Income (Loss) per Common Share—Diluted 


    $

    0.04


    $

    0.21


    $

    (0.23)


    $

    0.09

    Weighted Average Common Shares Outstanding:













    Basic 



    28,706



    28,602



    28,681



    28,552

    Diluted 



    28,786



    28,757



    28,681



    28,769

     

     

    Lumber Liquidators Holdings, Inc.

    Condensed Consolidated Statements of Cash Flows

    (Unaudited, in thousands)




    Nine Months Ended Septemeber 30,



    2019


    2018







    Cash Flows from Operating Activities:







    Net (Loss) Income 


    $

    (6,735)


    $

    2,497

    Adjustments to Reconcile Net (Loss) Income:







    Depreciation and Amortization 



    12,903



    14,042

    Stock-Based Compensation Expense 



    3,621



    3,131

    (Gain) Loss on Disposal of Fixed Assets



    (284)



    1,812

    Changes in Operating Assets and Liabilities:







    Merchandise Inventories 



    10,270



    (44,450)

    Accounts Payable 



    (14,186)



    (3,196)

    Customer Deposits and Store Credits 



    4,810



    5,079

    Prepaid Expenses and Other Current Assets 



    (3,665)



    1,153

    Accrual for Legal Matters and Settlements



    4,575



    2,951

    Payments for Legal Matters and Settlements



    (33,725)



    (2,264)

    Other Assets and Liabilities 



    5,341



    (6,584)

    Net Cash Used in Operating Activities 



    (17,075)



    (25,829)








    Cash Flows from Investing Activities:







    Purchases of Property and Equipment 



    (13,523)



    (10,651)

    Other Investing Activities



    419



    553

    Net Cash Used in Investing Activities 



    (13,104)



    (10,098)








    Cash Flows from Financing Activities:







    Borrowings on Credit Agreement



    85,500



    37,000

    Payments on Credit Agreement



    (61,000)



    (9,000)

    Payments on Financed Insurance Obligations



    -



    (612)

    Other Financing Activities



    (1,104)



    (163)

    Net Cash Provided by Financing Activities 



    23,396



    27,225

    Effect of Exchange Rates on Cash and Cash Equivalents 



    823



    595

    Net Decrease in Cash and Cash Equivalents 



    (5,960)



    (8,107)

    Cash and Cash Equivalents, Beginning of Period



    11,565



    19,938

    Cash and Cash Equivalents, End of Period


    $

    5,605


    $

    11,831

     

     

    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 


    Nine Months Ended



    September 30,


    September 30,



    2019

    2018


    2019

    2018



    (dollars in thousands)

    Gross Profit, as reported (GAAP)


    $

    95,674


    $

    100,682


    $

    291,772


    $

    296,964














    Antidumping Adjustments 1



    780



    (2,822)



    780



    (4,948)

    HTS Classification Adjustments 2







    (779)



    Sub-Total Items above



    780



    (2,822)



    1



    (4,948)














    Adjusted Gross Profit (non-GAAP measures)


    $

    96,454


    $

    97,860


    $

    291,773


    $

    292,016


    Represents countervailing and antidumping expense (income) associated with applicable prior-year shipments of engineered hardwood from China.

    Represents classification adjustments related to the Harmonized Tariff Schedule ("HTS") duty categorization in prior periods during the nine months ended September 30, 2019.

     

     

    Items impacting SG&A with comparisons to the prior-year period includes:



    Three Months Ended September 30,


    Nine Months Ended September 30,


    2019


    2018


    2019


    2018


    (dollars in thousands)

    SG&A, as reported (GAAP)

    $

    93,495


    $

    93,987


    $

    294,392


    $

    292,628













    Accrual for Legal Matters and Settlements 3






    4,575



    2,951

    Legal and Professional Fees4


    408



    2,991



    3,403



    9,382

    All Other 5




    1,769





    1,769

    Sub-Total Items above


    408



    4,760



    7,978



    14,102













    Adjusted SG&A (a non-GAAP measure)

    $

    93,087


    $

    89,227


    $

    286,414


    $

    278,526


    This amount represents the charge to earnings for the Kramer employment case and certain Related Laminate Matters, which is described more fully in Note 8 to the condensed consolidated financial statements in the September 30, 2019 Form 10-Q.

    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.

    All Other in 2018 represents an impairment of certain assets related to the Company's decision to exit the finishing business.

     

     

    Items impacting operating income (loss) and operating margin with comparisons to the prior-year period includes:



    Three Months Ended September 30,




    Nine Months Ended September 30,




    (dollars in thousands)




    (dollars in thousands)




    2019

    % Sales


    2018

    % Sales


    2019

    % Sales


    2018

    % Sales

    Operating Income (Loss), as reported (GAAP)

    $

    2,179

    0.8

    %


    $

    6,695

    2.5

    %


    $

    (2,620)

    (0.3)

    %


    $

    4,336

    0.5

    %





















    Gross Margin Items:




















    Antidumping Adjustments 1


    780

    0.3

    %



    (2,822)

    (1.0)

    %



    780

    0.1

    %



    (4,948)

    (0.6)

    %

    HTS Classification Adjustments 2


    %






    (779)

    (0.1)

    %




    Gross Margin Subtotal


    780

    0.3

    %



    (2,822)

    (1.0)

    %



    1

    0.0

    %



    (4,948)

    (0.6)

    %





















    SG&A Items:




















    Accrual for Legal Matters and Settlements3








    4,575

    0.6

    %



    2,951

    0.4

    %

    Legal and Professional Fees4


    408

    0.2

    %



    2,991

    1.1

    %



    3,403

    0.4

    %



    9,382

    1.2

    %

    All Other 5





    1,769

    0.7

    %






    1,769

    0.2

    %

    SG&A Subtotal 


    408

    0.2




    4,760

    1.8




    7,978

    1.0




    14,102

    1.7






















    Adjusted Operating Income (a non-GAAP
    measure)

    $

    3,367

    1.3

    %


    $

    8,633

    3.3

    %


    $

    5,359

    0.7

    %


    $

    13,490

    1.7

    %


    1,2,3,4,5 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.

     


     

    Items impacting earnings per diluted share with comparisons to the prior-year periods include:



    Three Months Ended September 30,


    Nine Months Ended September 30,


    2019


    2018


    2019


    2018


    (dollars in thousands, except per
    share amounts)


    (dollars in thousands, except per
    share amounts)

    Net Income (Loss), as reported (GAAP)

    $

    1,045


    $

    5,923


    $

    (6,735)


    $

    2,497

    Net Income (Loss), per Diluted Share as reported (GAAP)

    $

    0.04


    $

    0.21


    $

    (0.23)


    $

    0.09













    Gross Margin Items:












    Antidumping Adjustments 1


    780



    (2,822)



    780



    (4,948)

    HTS Classification Adjustments 2






    (779)



    Gross Margin Subtotal


    780



    (2,822)



    1



    (4,948)













    SG&A Items:












    Accrual for Legal Matters and Settlements3






    4,575



    2,951

    Legal and Professional Fees4


    408



    2,991



    3,403



    9,382

    All Other 5




    1,769





    1,769

    SG&A Subtotal 


    408



    4,760



    7,978



    14,102













    Adjusted Earnings 

    $

    2,233


    $

    7,861


    $

    1,244


    $

    11,651

    Adjusted Earnings per Diluted Share (a non-GAAP measure)

    $

    0.08


    $

    0.27


    $

    0.04


    $

    0.40















    1,2,3,4,5 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.

     

     

    SOURCE Lumber Liquidators