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LL Flooring Holdings, Inc. (LL)·Q3 2023 Earnings Summary
Executive Summary
- Net sales declined 19.7% year over year to $215.8M as macro weakness, lower consumer confidence, elevated rates, and softer Pro demand reduced transaction counts; GAAP diluted EPS was a loss of $1.25 (vs. $0.13 profit a year ago), and operating margin fell to -13.7% .
- Adjusted gross margin expanded to 37.5% (up 190 bps YoY) on freight cost relief and agile sourcing, but unusual items (antidumping duty rate change and UFLPA-related vinyl detentions) compressed GAAP gross margin to 31.7% and widened GAAP operating loss and other expense in the quarter .
- Management withdrew formal guidance earlier in 2023 and continues not to provide financial guidance; commentary reaffirmed challenged revenues for FY23, capex at approximately $20M, and new actions including closing 8 underperforming stores and delivering $7.3M YTD cost savings .
- Consensus estimates from S&P Global were unavailable for LL in Q3 2023; thus, beat/miss vs Street cannot be determined and estimates may need revisiting given macro and exceptional items (S&P Global data unavailable).
What Went Well and What Went Wrong
What Went Well
- Adjusted gross margin increased to 37.5% (+190 bps YoY) driven by freight cost relief and sourcing agility, despite lower volumes; adjusted gross profit was $80.9M .
- Strategic initiatives progressing: management emphasized brand transformation, focusing investments on top growth priorities, growing brand awareness, innovating products, omnichannel consistency, and operating efficiencies; CRM rollout on track by year-end .
- Working capital improvements: inventories decreased ~14.9% from year-end and operating cash flow of $8.4M YTD through Q3; liquidity stood at $120.2M (excess ABL availability $110.2M + cash $10.0M) .
What Went Wrong
- Revenues fell 19.7% YoY; comps down 20.5%; transaction counts decreased across consumer and Pro, reflecting continued macro headwinds and internal brand awareness challenges .
- Unusual charges: $10.7M adverse antidumping duty rate change (plus $5.5M interest in other expense) and $1.6M costs tied to CBP detentions under UFLPA pressured GAAP margins and earnings .
- SG&A deleverage: SG&A was 45.5% of sales (vs. 37.1% LY), reflecting volume deleverage and investments (distribution center, CRM, labor/occupancy), contributing to GAAP operating loss of $29.6M .
Financial Results
Quarterly progression (prior quarter vs current)
Year-over-year (Q3 vs Q3 prior year)
Segment and KPIs
Non-GAAP and unusual items (Q3 2023):
- Antidumping duty rate change: $10.7M (gross margin impact) and $5.5M interest in other expense .
- UFLPA vinyl detentions: $1.6M incremental costs in Q3 .
Guidance Changes
Note: The company is not providing formal financial guidance at this time .
Earnings Call Themes & Trends
Management Commentary
- “We continue to navigate uncertainty in the macroeconomic environment due to low consumer confidence, inflation, an elevated interest and mortgage rate environment and lower existing home sales… we remain confident in our ability to deliver the high-touch service of an independent flooring retailer combined with the value, assortment, and convenience of a national brand.” — Charles Tyson, President & CEO .
- “We are disappointed in our third quarter results… we remain committed and continue to execute on our brand transformation strategy and our five strategic initiatives… We believe each initiative will improve sales productivity and profitability long term.” — Charles Tyson .
- “I believe that we are seeing promising signs that our strategic initiatives are starting to improve our capabilities… this gives us confidence that we will return to growth as the economic environment improves and, in the long term, regain share…” — Charles Tyson .
Q&A Highlights
- Management discussed revenue visibility and macro headwinds, reiterating uncertainty but confidence in strategic initiatives and brand transformation .
- Clarifications on gross margin drivers emphasized freight relief and alternative sourcing, while detailing unusual impacts from UFLPA-related detentions and antidumping duty rate changes .
- Updates on CRM rollout, Pro customer focus, and carpet expansion were provided as key growth investments intended to drive future sales productivity .
- Expense management and portfolio actions: $7.3M YTD savings and planned closure of 8 underperforming stores to align cost structure with sales run-rate .
Estimates Context
- S&P Global consensus estimates for LL were unavailable for Q3 2023 in our system; therefore, we cannot quantify beat/miss vs Street for revenue or EPS this quarter (S&P Global data unavailable).
- Given the unusual antidumping duty rate change and UFLPA-related costs in Q3, Street models may need to adjust for non-recurring items impacting GAAP results while considering adjusted margin tailwinds from freight relief .
Key Takeaways for Investors
- Revenue remained under significant pressure (sales -19.7% YoY; comps -20.5%), reflecting macro weakness and lower consumer/Pro transaction counts .
- Adjusted gross margin improved to 37.5% despite volume declines, aided by freight relief and agile sourcing; monitor sustainability of these tailwinds into 2024 .
- GAAP results were burdened by unusual items: $10.7M antidumping duty rate change and $5.5M interest, plus $1.6M UFLPA-related costs; these are critical to exclude when assessing core earnings power .
- Expense actions accelerating: $7.3M YTD savings and closure of 8 underperforming stores to align cost structure; watch for additional savings and impact on SG&A % .
- Strategic growth vectors (CRM rollout, Pro focus, carpet expansion) are progressing; traction in these programs is central to reaccelerating traffic and conversion as macro normalizes .
- Liquidity remains adequate ($120.2M), with inventory reductions supporting working capital; continued discipline around capex (~$20M) and portfolio optimization should support flexibility .
- Near-term trading implications: headline risk from macro and regulatory (UFLPA) persists; medium term, adjusted margin resilience and cost actions can improve earnings leverage if demand stabilizes .