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LF

LL Flooring Holdings, Inc. (LL)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 2023 suffered from macro-driven demand weakness: net sales fell 19.7% to $211.8M; comps declined 20.2%, with GAAP gross margin rising 270 bps to 38.6% on vendor cost outs and lower transportation costs, while SG&A deleveraged to 46.8% of sales on volume pressure .
  • GAAP diluted EPS was a loss of $0.62; adjusted loss per diluted share was $0.64, reflecting non-GAAP adjustments tied to UFLPA-driven vinyl charges and antidumping duty rate changes .
  • Management declined to provide financial guidance for 2024; qualitative outlook calls for stable adjusted gross margin YoY, higher SG&A as percent of sales, and ~$15M capex to support strategic initiatives (carpet rollout, CRM) .
  • Key narrative drivers: continued weakness in existing home sales and big-ticket remodeling demand; improving gross margins from freight/vendor cost relief; store portfolio optimization (7 closures, 1 opening; 437 stores at YE) .

What Went Well and What Went Wrong

What Went Well

  • Gross margin expanded 270 bps YoY to 38.6% on vendor cost-outs and transportation cost relief; adjusted gross margin rose 260 bps to 38.3% despite vinyl sourcing headwinds .
  • Management highlighted execution on brand transformation initiatives: “driving and improving NPS scores, innovating products including the execution of our carpet initiatives, and maintaining a strong focus on improving operational efficiencies and working capital management” .
  • Liquidity remained solid at $118.2M (excess availability $109.4M + cash $8.8M); operating cash flow generated $21.3M in 2023 from inventory and cost control .

What Went Wrong

  • Traffic and project sizes weakened: comparable store sales -20.2% YoY; demand softness from consumer and Pro segments amid low consumer confidence, inflation and weak existing home sales .
  • SG&A deleverage: GAAP and adjusted SG&A both 46.8% of sales (+430 bps YoY GAAP; +800 bps YoY adjusted), reflecting lower volume and continued investment in strategic initiatives despite declining sales .
  • Operating margin loss widened to -8.3% GAAP and -8.6% adjusted; diluted loss per share increased $0.09 YoY to $0.62 GAAP and $0.35 YoY to $0.64 adjusted .

Financial Results

Consolidated Metrics vs Prior Year, Prior Quarter, and Estimates

MetricQ4 2022Q3 2023Q4 2023
Revenue ($USD Millions)$263.9 $215.8 $211.8
GAAP Diluted EPS ($)$(0.53) $(1.25) $(0.62)
Adjusted Diluted EPS ($)$(0.29) $(0.78) $(0.64)
Gross Margin (%) GAAP35.9% 31.7% 38.6%
Gross Margin (%) Adjusted35.7% 37.5% 38.3%
SG&A (% of Sales) GAAP42.5% 45.5% 46.8%
SG&A (% of Sales) Adjusted38.8% 45.4% 46.8%
Operating Margin (%) GAAP(6.6)% (13.7)% (8.3)%
Operating Margin (%) Adjusted(3.1)% (7.9)% (8.6)%
EPS vs S&P Global ConsensusN/A (Unavailable)N/A (Unavailable)N/A (Unavailable)

Note: S&P Global Wall Street consensus estimates were unavailable via our tool for LL this quarter due to a CIQ mapping error; as a result, vs-estimate comparisons could not be made.

Segment/Revenue Mix

SegmentQ4 2022 ($M)Q3 2023 ($M)Q4 2023 ($M)
Net Merchandise Sales$226.9 $229.2 $183.1
Net Services Sales$37.0 $39.6 $28.7
Total Net Sales$263.9 $215.8 $211.8

KPIs

KPIQ2 2023Q3 2023Q4 2023
Comparable Store Sales YoY (%)(22.2)% (20.5)% (20.2)%
Transactions YoY change (%)N/AN/A(17.8)%
Average Ticket YoY change (%)N/AN/A(1.7)%
Avg Retail Price per Merchandise Unit YoY (%)N/AN/A(2.8)%
Store Count (period end)442 443 437

Non-GAAP Adjustments (Q4 2023)

  • Vinyl charges tied to CBP UFLPA detentions: $(0.3)% margin impact; antidumping/countervailing adjustments: ~0.0% margin impact; adjusted gross margin 38.3% vs GAAP 38.6% .
  • Adjusted operating margin reflects removal of legal/professional fees and duty impacts; GAAP operating margin (8.3)% vs adjusted (8.6)% .
  • Adjusted diluted EPS $(0.64) vs GAAP $(0.62), incorporating duty/vinyl and interest adjustments plus tax normalization .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Financial Guidance (Revenue/EPS)FY 2024None provided (Q3 and prior) None provided Maintained no formal guidance
Adjusted Gross MarginFY 2024Expected YoY improvement in 2023; stronger H2 (Q2 commentary) Expected to maintain YoY in 2024 Maintained/stable (vs prior YoY improvement commentary)
SG&A (dollars and % of sales)FY 2024SG&A dollars and % expected to increase YoY in 2023 Expected to increase YoY (lower sales; continued investment) Maintained higher SG&A outlook
Capital ExpendituresFY 20242023 capex ~$15–$20M 2024 capex ≈ $15M Lower vs 2023 mid-point

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3 2023)Current Period (Q4 2023)Trend
Macro: Existing home sales, rates, consumer confidencePersistent macro uncertainty; elevated rates; lower existing home sales impacting big-ticket remodel Management emphasized weak existing home sales and softness in home improvement/remodel demand as key headwinds Unchanged headwind
Supply chain/legal: UFLPA vinyl detentions, antidumping dutiesUFLPA vinyl detentions impacting gross margin; unfavorable duty rate changes with interest impacts Continued vinyl sourcing cost headwinds; adjusted metrics provided to strip duty/vinyl effects Ongoing, mitigated via sourcing
CRM/Pro initiativesCRM rollout to drive Pro sales; focus on top growth priorities and omnichannel consistency Continued emphasis on CRM and Pro customer experience; driving NPS and traffic over time Building capabilities
Product innovation: Carpet rollout, Duravana mixCarpet initiative expands addressable market; Duravana mix supports margins Carpet rollout continues; 2024 capex supports expansion; product innovation remains priority Ongoing execution
Store portfolio optimizationPlanned closure of ~8 underperforming stores into early 2024 7 closures, 1 opening in Q4; 437 stores at YE Active pruning
Working capital/liquidityInventory normalization; cash generation through inventory sell-through Liquidity $118.2M; operating cash flow $21.3M in 2023 Stable/liquidity-focused

Management Commentary

  • “Fourth quarter business conditions remain difficult… comparable store sales down 19.6%… continued declines in traffic and lower average project sizes for our consumer and pro customers.” — Charles Tyson, President & CEO .
  • “Leading economic indicators suggest that home improvement spending will continue to be challenged through at least the first half of 2024… we remain focused on executing on our brand transformation and… strategic initiatives.” — Charles Tyson .
  • 2024 outlook: “Adjusted gross margins are expected to maintain year-over-year… SG&A spend… expected to increase year-over-year… Capital expenditures of approximately $15 million in 2024.” — Company commentary .

Q&A Highlights

  • Demand drivers and mix: Management cited declines in Pro and consumer demand; comps -20.2%, driven by (17.8)% transactions and (1.7)% average ticket; average retail price per merchandise unit declined 2.8% YoY .
  • Cost actions and margin trajectory: Emphasis on vendor cost reductions, lower transportation costs, and sourcing agility to support gross margin stability despite pricing competition .
  • Capital allocation: 2024 capex ≈ $15M focused on carpet rollout and maintenance, with disciplined working capital and liquidity management .
  • Guidance: No formal financial guidance due to macro uncertainty; qualitative framework provided on margins and SG&A .

Estimates Context

  • S&P Global consensus (EPS and revenue) for Q4 2023 was unavailable via our Capital IQ mapping tool this quarter; as a result, we cannot provide vs-consensus comparisons. Management’s reported GAAP diluted EPS $(0.62) and adjusted $(0.64) and revenue $211.8M are disclosed above .
  • Given the lack of S&P Global estimates, near-term Street models may need to reflect stronger-than-expected gross margin relief but deeper SG&A deleverage on volume, alongside a cautious 1H24 demand backdrop .

Key Takeaways for Investors

  • Gross margin improvement is a bright spot; sustained freight/vendor relief and sourcing shifts are offsetting some vinyl/duty headwinds, but price competition remains a watch item .
  • SG&A deleverage is the central earnings constraint; until volumes recover, operating margin remains pressured despite cost actions and restructuring .
  • Traffic remains the core issue; CRM/Pro initiatives and carpet rollout are designed to drive traffic and conversion, but visibility is limited pending macro normalization .
  • Liquidity is adequate to bridge near-term softness; cash and excess availability total $118.2M, with disciplined working capital and capex plans (~$15M) .
  • Store portfolio optimization continues; closures and targeted openings suggest a focus on unit economics and cash flow over footprint growth .
  • With no formal guidance and a weak near-term macro read-through from existing home sales, narrative catalysts hinge on evidence of traffic stabilization and SG&A discipline; margin resilience could support downside protection if sustained .
  • Monitor non-GAAP adjustments (UFLPA vinyl, antidumping duties); normalization of these items remains an incremental EPS lever if resolutions sustain .