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LF

LL Flooring Holdings, Inc. (LL)·Q2 2023 Earnings Summary

Executive Summary

  • Q2 2023 net sales were $236.4M, down 20.9% year over year as transaction counts fell amid weak big-ticket discretionary demand; comparable store sales declined 22.2% and reported gross margin rose 10 bps to 35.8% while adjusted gross margin expanded 60 bps to 36.7% .
  • Sequentially, net sales were modestly lower versus Q1 ($240.7M in Q1 vs. $236.4M in Q2) and operating margin deteriorated from -5.5% to -8.7%; GAAP diluted EPS fell from -$0.37 in Q1 to -$1.35 in Q2, with adjusted diluted EPS of -$1.28 .
  • Management withdrew formal financial guidance but reiterated directional commentary: adjusted gross margins expected to improve YoY (stronger H2), SG&A dollars and SG&A% to rise YoY due to deleverage and investments, and 2023 CapEx of $15–$20M; liquidity stood at $145.5M (cash $7.7M, availability $137.8M) .
  • Q2 included corporate developments: the Board confirmed receipt (May 30) and later rejected (June 26) an unsolicited $5.76/share acquisition proposal, citing significant undervaluation—an overhang and potential catalyst for the stock depending on strategic outcomes .

What Went Well and What Went Wrong

What Went Well

  • Gross margin held/inched higher YoY despite >400 bps cost inflation—35.8% reported (+10 bps) and 36.7% adjusted (+60 bps)—supported by pricing/promotion and alternative sourcing strategies .
  • Working capital and liquidity management improved: liquidity of $145.5M (availability $137.8M, cash $7.7M); operating cash flow of $39.0M for the first six months, primarily from inventory sell-through and reduced purchases .
  • CEO highlighted operational focus to drive traffic and conversion (brand awareness, omnichannel consistency, CRM to drive Pro sales), and cost alignment; “we are actively pursuing operational opportunities to improve our performance…” and “operate the business with discipline from an expense and capital management standpoint” .

What Went Wrong

  • Demand weakness: net sales -20.9% YoY to $236.4M; comps -22.2% due to lower consumer and Pro spending; transaction counts declined materially .
  • Expense deleverage: SG&A rose to 44.4% of sales (+1,030 bps YoY), reflecting inflation and planned investments, driving operating margin to -8.7% (-1,030 bps YoY) .
  • Regulatory headwinds: $2.4M incremental costs and $0.5M legal fees tied to CBP detentions under UFLPA for PVC flooring; continued vinyl category disruption affected gross profit and sales .

Financial Results

Revenue, EPS, Margins vs Prior Periods

MetricQ2 2022Q1 2023Q2 2023
Total Net Sales ($USD Millions)$298.957 $240.698 $236.422
GAAP Diluted EPS ($)$0.09 $(0.37) $(1.35)
Adjusted Diluted EPS ($)$0.13 $(0.31) $(1.28)
Gross Margin % (Reported)35.7% 36.6% 35.8%
Gross Margin % (Adjusted)36.1% 37.4% 36.7%
Operating Margin % (Reported)1.6% (5.5)% (8.7)%

Segment Breakdown

MetricQ2 2022Q1 2023Q2 2023
Net Merchandise Sales ($USD Millions)$257.569 $210.497 $202.191
Net Services Sales ($USD Millions)$41.388 $30.201 $34.231
Total Net Sales ($USD Millions)$298.957 $240.698 $236.422

KPIs and Balance/Liquidity

KPIQ4 2022Q1 2023Q2 2023
Comparable Store Sales (% YoY)(9.5)% (15.4)% (22.2)%
Store Count (Period End)442 443 442
Liquidity ($USD Millions)$135.6 $157.0 $145.5
Cash & Cash Equivalents ($USD Millions)$10.8 $7.0 $7.7

Non-GAAP notes: Adjusted gross margin, SG&A, operating (loss) income and adjusted EPS reconcile to GAAP in the press release tables .

Guidance Changes

MetricPeriodPrevious Guidance (Q1 2023)Current Guidance (Q2 2023)Change
Financial GuidanceFY 2023Not providing financial guidance Not providing financial guidance Maintained
RevenueFY 2023Expected to be challenged due to macro and UFLPA customs delays Expected to be challenged due to macro; focus on brand/customer experience/product innovation Maintained
Adjusted Gross MarginFY 2023Improve YoY; stronger H2 (shipping rates/sourcing costs, pricing/promo, higher-margin mix) Improve YoY; stronger H2; pricing/promo and mix (Duravana) tailwinds Maintained
SG&AFY 2023SG&A dollars and SG&A% to increase YoY due to deleverage, inflation, DC/CRM investments SG&A dollars and SG&A% to increase YoY (deleverage, wages/benefits, DC/CRM investments) Maintained
Capital ExpendituresFY 2023~$15–$20M (DC, productivity, maintenance, 3 store openings) ~$15–$20M (DC, productivity, maintenance, 3 store openings) Maintained
Store OpeningsFY 2023Plan for 3 stores Plan for 3 stores Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2022 and Q1 2023)Current Period (Q2 2023)Trend
Macro demand (consumer & Pro)Q4: weaker consumer; Pro growth partly offset . Q1: “very challenging” macro; cautious consumer; pressure on higher-ticket discretionary .Management expects challenging macro to persist; limited sales visibility .Deteriorating from Q1 to Q2.
UFLPA/CBP detentions (PVC)Q1: customs delays caused incremental expenses and lost sales in vinyl .Q2: $2.4M gross profit impact and $0.5M legal fees; ongoing category pressure .Ongoing regulatory headwind.
Brand awareness & customer experienceQ4: higher marketing spend; focus on brand/customer experience . Q1: brand awareness pressure; omnichannel conversion focus .Continued pressure from low brand awareness; focus on seamless omnichannel experience .Execution focus; improvement targeted.
Pro sales & CRM platformQ4: double-digit Pro growth . Q1: CRM investment; drive Pro sales .Emphasis on implementing CRM to drive Pro sales and consultative selling .Building capability.
Product mix (Duravana)Q4: higher-margin products strategy . Q1: expect margin benefit from premium Duravana mix .Expect 2023 gross margin to benefit from Duravana mix .Positive mix tailwind.
Carpet initiativeQ1: carpet pilot launched (4 stores; plan to reach 24 by end of Q2) .Executing on carpet initiative to expand addressable market .Scaling early-stage pilot.
Supply chain & distribution centerQ1: new Dallas DC planned for Q3 to optimize network .Continued investment in new DC; SG&A impact near term .Investment phase.
Strategic/M&A—Receipt (May 30) and rejection (June 26) of $5.76/share proposal; Board open to higher-value discussions .Potential corporate action overhang.

Management Commentary

  • “Our second quarter performance primarily reflected the continued impact of the difficult macro backdrop… We are actively pursuing operational opportunities… broadening and growing our brand awareness… ensuring a consistent customer experience… and improving operating efficiencies by intently working to reduce costs…” — Charles Tyson, President & CEO .
  • “We continue to focus on our five strategic initiatives… implementing our CRM platform to drive Pro sales, improving store execution… increasing our brand awareness, executing on our carpet initiative… and aligning our cost structure to our run-rate of revenues.” — Charles Tyson .
  • “We expect the challenging macro environment to persist… operate the business with discipline from an expense and capital management standpoint… leveraging our inventory management practices to yield continued improvements in our overall working capital.” — Charles Tyson .

Q&A Highlights

  • The Q2 2023 earnings call occurred on August 9, 2023 at 8:00 a.m. ET, but the full transcript could not be retrieved due to a document database inconsistency; third-party sources are paywalled or restricted (MarketScreener/SA). As a result, Q&A detail is unavailable for inclusion in this recap .

Estimates Context

  • Wall Street consensus estimates via S&P Global were unavailable for LL Q2 2023 due to missing mapping in CIQ; therefore beats/misses versus Street cannot be assessed. Values from S&P Global were not retrievable.

Key Takeaways for Investors

  • Demand remains soft and more volatile: comps down 22.2% and transaction counts fell, underscoring macro sensitivity of big-ticket remodeling categories .
  • Margin management is a relative bright spot: gross margin resilience (+10 bps YoY reported; +60 bps adjusted) driven by pricing/promo and sourcing; mix tailwind from Duravana expected to continue in H2 .
  • Cost deleverage and investment burden near term: SG&A% up sharply to 44.4%; operating margin -8.7%; management is aligning costs but warns SG&A dollars and % of sales will rise YoY in 2023 .
  • Liquidity solid with improving working capital: $145.5M liquidity and $39.0M YTD operating cash flow; inventory sell-through aiding cash generation .
  • Regulatory risk persists in vinyl: UFLPA-related detentions continue to affect costs and availability; expect ongoing category-specific headwind and legal expenses .
  • Strategic optionality: Board rejected $5.76/share offer but remains open to value-enhancing transactions; M&A interest could shape medium-term outcomes and trading catalysts .
  • Near-term trading lens: Without formal guidance and with macro/regulatory headwinds, expect narratives to focus on H2 margin trajectory, CRM/Pro execution, carpet pilot scaling, and any updates to strategic alternatives; lack of Street consensus data limits immediate beat/miss framing .

Appendix: Source Documents

  • Q2 2023 8-K 2.02 and press release (full financials and non-GAAP reconciliations) .
  • Q1 2023 8-K press release .
  • Q4 2022 8-K press release .
  • Other Q2 press releases: proposal receipt and rejection .