U.S. markets open in 4 hours 12 minutes

Edited Transcript of LL earnings conference call or presentation 28-May-20 12:30pm GMT

Q1 2020 Lumber Liquidators Holdings Inc Earnings Call

TOANO May 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Lumber Liquidators Holdings Inc earnings conference call or presentation Thursday, May 28, 2020 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Charles E. Tyson

Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director

* Nancy A. Walsh

Lumber Liquidators Holdings, Inc. - CFO

* Nancy M. Taylor

Lumber Liquidators Holdings, Inc. - Independent Chairman

* Paul Taaffe

Lumber Liquidators Holdings, Inc. - IR Executive

================================================================================

Conference Call Participants

================================================================================

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Robert Adam Friedner

Piper Sandler & Co., Research Division - Research Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - MD Of Equity Research

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to Lumber Liquidators First Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded and may not be reproduced in full or in part without permission from the company. I would now like to turn the conference over to Paul Taaffe. Please go ahead.

--------------------------------------------------------------------------------

Paul Taaffe, Lumber Liquidators Holdings, Inc. - IR Executive [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning, everyone, and thank you for joining us. Today, I'm joined by Nancy Taylor, Chairperson of the Board of Directors; Charles Tyson, our President and Chief Executive Officer; and Nancy Walsh, our Chief Financial Officer.

Again, let me reference the safe harbor provisions of the U.S. securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the Lumber Liquidators' filings with the SEC. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative after today, and Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now I am pleased to introduce Ms. Nancy Taylor, Chairperson of Lumber Liquidators' Board of Directors. Nancy?

--------------------------------------------------------------------------------

Nancy M. Taylor, Lumber Liquidators Holdings, Inc. - Independent Chairman [3]

--------------------------------------------------------------------------------

Good morning. I'm delighted to join the call this morning to comment on Lumber Liquidators', now LL Flooring, exciting news. I hope you've seen the press release we issued this morning that along with our first quarter results, announced the appointment of Charles Tyson as our new Chief Executive Officer as well as a member of the Board of Directors. This was a decision enthusiastically made by the Board following a robust and thorough search and assessment process. It's important to note that our CEO search process was not hindered in any way by the COVID-19 crisis.

The search process yielded a strong pool of external candidates, and we were able to engage and explore the opportunity with our top external candidates. We were pleased with the high level of interest expressed by them, and Charles had some tough competition. He owned this position. Charles' leadership during the COVID-19 crisis has been exceptional. It's hard to envision a more difficult test for a CEO candidate. And throughout, Charles has been passing with flying color. He has been proactive, calm and decisive. His leadership has fostered teamwork and confidence throughout the organization. Charles' focus on the well-being of our associates and customers have not wavered nor has his focus on driving financial results. Not always an easy balancing act even in the best of time.

I want to recognize too, the critical role Charles played even before stepping into the interim President role in developing and driving our transformation plan and go-forward strategy. As you'll view shortly, Charles and the management team have continued to advance that strategy even in the midst of the crisis, while taking aggressive actions to reduce spending and expand the company's liquidity. While Charles' performance during the crisis certainly informed the Board's decision, Charles also met the position criteria that the Board had outlined at the outset of the CEO search process.

During his tenure with the company, he has demonstrated the strategic agility and execution orientation, we believe the company needs in its CEO. His past experience in building B2B businesses is also important to the future growth of the company.

Notably, Charles has been guiding the company's navigation of the tariffs and other sourcing challenges. The exciting online tools implemented by the company within the last year are directly attributable to Charles and the digital team he put in place, and those tools have proven to be extremely valuable in advancing our online business during the crisis. All of this is a long way of saying that the Board is confident in Charles and the strengthened leadership team and organization.

I would also like to take this opportunity on behalf of the Board to recognize all of the company's associates who have worked tirelessly to adapt to the challenges over the last few months. Thank you. And now I'll turn the call over to Charles.

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [4]

--------------------------------------------------------------------------------

Thank you, Nancy. I'm honored and privileged to have been given the opportunity to lead LL Flooring as the company's President and CEO, and I'm extremely excited about the opportunities that lie ahead for our great team & company.

Over the last few months, our teams have shown immense focus and drive to continue servicing all our customers safely while meeting their hard surfaces' flooring needs, either online, through our call centers or our stores, for those that were able to operate based on local operating restrictions and laws.

It's gratifying every morning to read our 5-star customer reviews and see the recognition given to our field and digital teams who found creative ways to help customers with their flooring projects during this exceptionally challenging operating environment. This relentless focus on helping invest and improve us across the spaces that they can be proud of is what drives our LL team to become the most sought-after hard surfaces flooring company.

I look forward to working with both our Board and management team on executing the key elements of our strategy while navigating through the impact of the COVID-19 virus over the coming months to grow LL flooring into the premier brand in the hard surfaces flooring business.

This morning, I would like to spend a few minutes recapping our performance in Q1, including our progress against our transformation plan. We will highlight the actions we're taking to manage in the current COVID-19 environment, including our cost management and liquidity efforts as well as our ability to service our Pro and DIY customers.

I'll conclude with the steps we're taking to position our company as our market continues to reopen for the longer-term future.

During Q1, we remain focused value -- from delivering value through competitive pricing, accessible expertise and a trend-right assortment as we executed that transformation plan focused on our 3 strategic pillars of improving our customer experience, driving traffic and transactions in our stores and online and improving profitability. We are extremely pleased with our sales and profitability results prior to experiencing the impact of COVID-19, which showed we were making solid progress against our strategic pillars.

Our field teams continued to strengthen relationships with Pros through the execution of a store-specific targeted contact strategy that focuses on building both new and existing relationships with local Pros around each store. As we described on our Q4 call, we continue to enhance our assortment in wood and vinyl with the significant additions of new trend-right SKUs in our solid wood business and broadened assortment in the fast-growing Vinyl plant category to ensure we're meeting the needs of the Pro. We're encouraged that third-party data showed we gained market share in these important categories in the first quarter.

In addition, as part of our longer-term strategic initiative to enhance our customers' experience, we made tremendous strides enhancing our omnichannel experience which enables our customers to utilize our website, customer relationship center and store teams to simplify their overall experience and expedite purchasing decisions. This has been especially critical in our current environment. We rolled out our new online Floor Finder tool in February to help customers who are early in their flooring journey, narrow their product evaluation based on a series of simple questions related to planned use, desired look and budget.

This tool couples well with the online Picture It! tool. The unique feature of Picture It! is it allows customers to select a floor from our online assortment and see a digital rendition of their selection in their actual room. We're seeing growing utilization of both tools and increased conversion as customers advance their flooring journey in the comfort of their own home.

Our first quarter performance provides strong evidence of our transformational progress as our quarter-to-date comp sales through March 21 were approximately 4% and in line with our expectations.

Our sourcing and merchant teams should be congratulated for our enhanced profitability performance in the first quarter. We generated a significant 410 basis point increase in gross margin rate over the first quarter of 2019, driven by our work beginning in late 2018 to lower product costs through alternative country sourcing and supply chain efficiency efforts. We leveraged adjusted SG&A as a percent of sales by driving lower operating costs even through first quarter comp sales declined slightly.

As a result, adjusted operating income was $9.6 million and 3.6% of sales, an increase of over $11 million versus the first quarter of last year. This was our highest quarterly adjusted operating income since the first quarter of 2015. Excluding Q4 of 2019, where we benefited from the recovery of tariff payments, even with the significant impact of COVID-19 in March.

Our strong profit performance, combined with the working capital efficiency, resulted in nearly $36 million in cash flow from operations, a $29 million improvement from Q1 last year.

In early March, as we began to see the effects of COVID-19, we established a crisis team in reaction to the pandemic to identify and execute our business continuity plan to mitigate the impact while safely serving customers across our national footprint. We complied with state and local orders and prioritize the safety of employees, customers and communities while developing flexible operating strategies. In the final weeks of March, many municipalities issued state-at-home orders in reaction to COVID-19. And we closed as many as 56 stores for a period of time, while all other stores operated under reduced hours and/or warehouse-only conditions, offering curbside pickup and job-site delivery for our Pros and DIY customers. Comps for the last week of March were approximately negative 45% as customers pulled back, resulting in a negative 0.9 comp for the quarter.

While our practice is to not provide intra-quarter updates, due to the unprecedented current circumstances, I'd like to provide a little color on actions we've taken since the end of Q1 and a few quarter-to-date trends to help frame the current environment. In April and May, the team established operating procedures to safely maintain operations and minimize store closures, allowing us to continue to serve our Pro and DIY customers. We also saw the opportunity to leverage the strategic investments in digital capabilities that we made over the past 18 months, including the new Floor Finder and Picture It! tools to serve customers at llflooring.com. Web traffic has increased meaningfully in recent weeks, with online sales growing approximately 260% in April from the 2019 run rate and accounting for approximately 20% of total sales in April.

In addition, our website allows customers to connect with our fully open and warehouse-only stores to complete transactions and fulfill orders. We have expanded availability of online flooring samples and are operating with extended hours in our customer relations center for voice and click-to-chat customer support. Our customer relationship center transitioned seamlessly to remote work and have been generating positive revenue in recent weeks, specifically supporting our Pro business. We have also developed a new in-store remote video consultation service as we adapt to changing consumer behavior and preferences, and we're encouraged by the orders that the new technology is driving.

To further support customers during this challenging time, we extended the length of our private label promotional financing offer, increased the frequency of our 24-month deferred interest promotion that caters to our DIFM customers and lowered the minimum qualifying purchases for other financing offers to give our DIY customer better monthly payment options.

As we ended April, we saw a gradual improvement in demand, but due to the restrictions related to COVID-19, we chose to significantly scale back our April sale, our largest event of the year. We are confident this was the correct decision considering the reduced demand environment and out of an abundance of caution for our team and our customers. While the right decision, it did further impact comps this year in both April and May. Despite that, in May, comps have shown further gradual improvement and through the week ending May 23, second quarter-to-date comps are down approximately 30%. The continued expansion of gross margin percentage and lower expenses is partially offsetting the impact on profitability from the lower sales. We are encouraged by the moderating sales trend, but it is important to note that with the uncertainty of the current environment and with more than 1 month left in the quarter. These trends could change materially. As markets have begun to reopen, we continue to update our financial scenarios with refined assumptions. We will be closely monitoring the broader macro trends and the variables that have historically influenced flooring demand, like housing turnover, unemployment, interest rates and remodeling activity and are utilizing federal state and local COVID impact recovery forecast to evolve our operating models.

We're utilizing safety measures such as personal protective equipment for employees and the intimacy of our small showroom model provides the opportunity for scheduled appointments and other steps to ensure social distancing and contact free engagement. Today, approximately 60% of our stores are fully operational. Approximately 25% are scheduling appointments to allow customers to visit showrooms and approximately 15% are utilizing a warehouse-only model, while less than 10 stores remain closed.

In regard to liquidity, we have taken steps to increase financial flexibility and maintain agility during this challenging time. These steps include reducing or eliminating costs, managing inventory flow, deferring and abating payments and reducing the number of planned store openings in the second half as well as overall capital spending. We have suspended all overnight travel and other discretionary spending and reduced our advertising spend to enhance near-term liquidity. While we reduced our overall advertising spend, we have continued to invest in digital marketing to drive growth through search and social channels like Pinterest. Through this investment, we will ensure our brand grows and relevance for customers beginning their flooring journey online.

Responding to reduced demand and the changes in the current operating model related to COVID-19, beginning in April, we made the difficult decision to furlough a number of store associates, cut store associate hours and reduce operating hours in our distribution centers. Our corporate staff has also been working remotely since early March and salaried corporate employees as well as our Board of Directors have taken a temporary reduction in pay. As demand trends have improved, we have already recalled a number of furloughed associates and returned to normal operations in our Virginia DC. Nancy will describe these liquidity steps in greater detail in her remarks.

Our near-term focus remains on maintaining flexibility and navigating the crisis, but we are also continuing to invest in and execute our key strategic initiatives. These include, among others, continuing our Pro initiative, updating our digital platform and advancing our brand revitalization plan, all while continuing to build a strong leadership team to execute a transformation. We have performed extensive research into Pros most relevant to our retail model, including flooring installers, small to medium-sized homebuilders and remodelers. And as I mentioned earlier, we are focused on building strong relationships with them and have developed assortments that meet their needs.

As we look to the future, our plan is to enhance associate training, allowing our teams to initiate trial by Pros who haven't shopped us before, build scale and earn retention of these important customers. We're also continuing to make progress on our new digital platform that will launch in Q3 and will significantly enhance the customer online experience, especially in the mobile environment as we continue to drive engagement earlier in the project journey.

Turning to our brand. Over the past several quarters, we have shared some of our work related to revitalizing our brand in the marketplace. As part of that, we have updated our advertising campaign to be more experiential, connecting with consumers in their home and emphasizing our full value proposition, and the response has been positive. In addition, we have evolved our brand to make our name more relevant to hard surface flooring. That journey began with the utilization of llflooring.com and our new ad campaign beginning in September of 2019. And we took another step in April of this year as we began using "Lumber Liquidators is now LL Flooring" in media, including our website and other digital marketing. We are closely evaluating consumer and Pro response and are continuing to take a thoughtful and measured approach to our brand evolution.

In addition, even during these uncertain times, we're continuing to strengthen our leadership team. In April, we announced the addition of Matt Argano as our Chief Human Resource Officer. Matt brings an extensive HR background to our team, including significant retail experience. We will lean heavily on Matt, as we continue to focus on leading with expertise for our customers and driving engagement with our employees.

Furthermore, I'm excited to announce the promotion of Damien McGaugh to Senior VP of Retail and Commercial Sales, leading our stores, Pro and in-store organizations and customer relationship center. Damien has been with LL Flooring for 9 years, taking on roles of increasing responsibility, including serving as Regional Manager, Divisional Vice President of our Southern Division and most recently as interim Head of Stores. He is a strong leader with years of flooring experience and has been an integral part of our COVID-19 response. I'm confident he will bolster our sales culture and commitment to customer service that will deliver future performance.

I would like to thank all our vendors, landlords and service providers, many of whom are partnering with us to reduce and defer payments as we carefully manage liquidity. Most of all, I would like to thank all of our associates for their committed service during these trying times. Many, including those working reduced hours or taking salary reductions and making personal sacrifices to help our company weather the current COVID-19 crisis. Despite the current challenges, I'm amazed and encouraged by the energy I see in our teams, their creativity and flexibility and their commitment to safely serve our customers. It's that drive that positions us well to capitalize on opportunities that exist during this crisis and when it passes. It's just one example of the team's desire to serve customers.

In April, Aaron Gober, our store manager in Redford, Michigan, a suburb of Detroit, received a call from a return customer who wanted to complete a bedroom flooring project. Aaron spent time on the phone with the customer discussing the attributes of the product he could offer. He walked her through the steps to use our online Picture It! tool to allow her to visualize the narrowed list of products in her room. As a final step, Aaron invited her to the store, and while the showroom was closed due to state order, the customer remained outside and Aaron held out large flooring samples up to the window to allow her to confirm her selection. He worked up a quote, added some samples of the selected floor to a bag and set it outside for the customer to retrieve. The next day she called and placed the order. Certainly not a typical quote to close process, but an example of our team's ingenuity and drive to service customers.

LL Flooring is resilient, and we believe we are positioned to manage the current unprecedented crisis. Our transformation is well underway, and we are investing in the key initiatives that we believe will position us for a strong future. I will now turn the call over to Nancy Walsh to share the financial details of the quarter. Nancy?

--------------------------------------------------------------------------------

Nancy A. Walsh, Lumber Liquidators Holdings, Inc. - CFO [5]

--------------------------------------------------------------------------------

Thanks, Charles. Good morning, everyone. In the first quarter, net sales were [$267 million] (corrected by company after the call), an increase of 0.4% over last year. Comparable store sales decreased 0.9% versus a year ago and was aided by an additional day, February 29 in 2020. The overall net sales increase resulted from a 0.4% growth in merchandise sales and an approximate 1% increase in service sales. Our comp decrease was the result of a 4% increase in our average transaction value, offset by a 4.9% decrease in transaction count, driven by the last 2 weeks of March. Q1 comp transactions were positive through March 14.

Gross profit for the first quarter of 2020 increased $11 million to $105 million from $94 million in the first quarter of 2019. The gross margin rate for the quarter increased 410 basis points to 39.3% compared to 35.2% in the same quarter a year ago. The increase in gross margin was primarily driven by our work to enhance margins through cost out and supply chain efficiency efforts, which became more apparent following the tariff exclusion as well as the larger mix of higher-margin vinyl sales, retail price optimization and reduced discounting in the stores.

As background on the tariff exclusion, approximately 46% of our product was subject to Section 301 tariffs through most of 2019, but that declined to approximately 10% to 15% following the November 2019 exclusion on Click Vinyl and engineered products granted by the U.S. trade representative. We are monitoring the scheduled expiration of this exclusion currently slated for August of this year. Should the tariff exclusion not be extended, there would be an immediate impact to our product cost and cash flow, but a delayed impact to margin based on the flow of inventory.

SG&A expense for the first quarter was $96 million compared to $97 million in the first quarter of last year. SG&A in both quarters included incremental legal as well as other costs and credits related to lawsuits, investigations and certain other legal matters. Both periods' items are adjusted in the non-GAAP reconciliation section of the press release. When excluding these items from both periods, adjusted SG&A expense for the quarter was $95 million or 35.7% of sales and leveraged 10 basis points on a percent-to-sales basis versus the same quarter a year earlier, inclusive of the impact of 7 net new stores year-over-year.

The company's focus on expense management and process efficiency helps deliver the year-over-year reduction in adjusted SG&A as a percent of sales in the quarter. For the quarter, we recorded operating income of $8.8 million compared to an operating loss of $3.4 million in Q1 of 2019. After adjusting for the SG&A items previously noted, we had adjusted operating income of $9.6 million in the quarter, an $11 million increase compared to an adjusted operating loss of $1.6 million last year. The year-over-year increase was primarily driven by the work we've done to enhance gross margin. We recorded an income tax benefit of $4.4 million for the quarter. Under the provision of the CARES Act, we are able to fully expense property that was previously depreciated over 39 years. Since this change is retroactive, we amended a previously filed federal tax return. And additionally, we're able to carry the increased loss back under the 5-year net operating loss carryback provision. This resulted in a $4.9 million refund that we expect to receive later this year.

Net income for the first quarter of 2020 increased $17 million to $12 million compared to a net loss of $4.9 million for the first quarter of 2019. While adjusted earnings on non-GAAP measure for the first quarter of 2020 was $13 million, a year-over-year increase of $16 million compared to an adjusted loss of $3.6 million for the first quarter of 2019.

Finally, earnings per diluted share were $0.42 for the quarter, inclusive of the tax benefit from the CARES Act versus a loss per share of $0.17 in the year ago quarter. On an adjusted basis, Q1 earnings per diluted share increased $0.57 to $0.44 a share compared to an adjusted net loss per share of $0.13 last year.

Turning to the balance sheet. Inventory at the end of the first quarter was $270 million, down $30 million from Q1 2019 and down $17 million from the end of 2019. The reduction in inventory from Q1 last year was primarily driven by the tariff exclusion on vinyl products imported from China. The reduction in inventory from the end of 2019 was driven by the impact of COVID-19 on our Asian supply chain in February and March as well as our ongoing operational efforts to manage inventory efficiently.

Net cash provided by operating activities was $36 million in the quarter, an increase of $20 million over the first quarter of 2019. The increase was primarily driven by strong growth in net income and working capital efficiency in the quarter and reflects the intrinsic ability to generate cash flow from our operating model. We ended the quarter with $64 million in outstanding debt under our credit agreement, which was $18 million lower when compared to Q4 2019, and our cash and cash equivalents balance increased by $13 million compared to Q4 2019 and was $22 million at the end of the quarter.

As of March 31, 2020, the company had $131 million in liquidity, comprised of $22 million of cash and cash equivalents and $109 million of excess availability under the credit agreement. With regard to pending legal settlement payments, we funded $4.75 million related to the Kramer settlement in early April, and we expect to fund the remaining $13 million related to the Gold settlement no earlier than the court's final approval hearing currently scheduled for September 24, 2020.

As previously announced, we have taken significant steps to supplement liquidity as we build flexibility to weather the challenges related to COVID-19. We have taken proactive steps to reduce costs, manage inventory flow, defer payments and delay or stop noncritical projects such as pausing the planned opening of certain new stores in the second half and reducing overall capital spending to approximately 50% of our previous plan. Specifically, we have implemented a temporary reduction in all salaried corporate employees and the Board of Director compensation. Reduced hours for certain store and distribution center employees to align our staffing with retail demand and delayed or canceled new store opening plans in the second half.

We are also closely working with our vendor partners and landlords to extend terms and arrange for deferred payments or abatements where appropriate with repayment agreements providing ample flexibility. Reflective of these efforts, our days payable outstanding has increased from 30 days as of the end of March to 44 days as of the end of April and is expected to continue to grow in May. We are utilizing the provisions of the CARES Act to defer the employer portion of social security taxes for the remainder of 2020. These deferred taxes will be repaid in equal installments at the end of 2021 and 2022. We also expect to benefit from employee retention credit. The company has completed an initial analysis of the tax effects of the act but continues to monitor developments by federal and state rule-making authorities regarding implementation of the act.

On April 17, we amended our credit facility and expanded our borrowing capacity. Our current credit agreement maturity remains March of 2024 and contains no financial covenants, except for a fixed charge coverage ratio if borrowings exceed 90% of availability.

Additionally, through May 21, we have received approximately $4 million of the expected $27 million of tariff refunds and interest from U.S. customs associated with the November 2019 retroactive tariff exclusion on click Vinyl and Engineered products imported from China. While timing of the remaining payments is uncertain due to the ongoing COVID crisis, these receipts are expected in 2020 and will provide additional liquidity in the coming months and are additive to the other liquidity work we've done.

Through the efforts I've described, we expect to reduce the operating and tax expenditures by approximately $20 million and reduce capital expenditures by approximately $10 million from our original 2020 plan.

In addition, we have deferred approximately $20 million of payables by extending payment terms.

Furthermore, the remaining tariff exemption funding of approximately $23 million will provide additional cash through the year and the recently announced ABL Facility Amendment provides additional flexibility. As of May 21, we had liquidity of $145 million, consisting of excess availability under our credit agreement of $74 million and cash and cash equivalents of $71 million. In addition, our debt balance as of May 21 remained $101 million.

We are modeling multiple financial scenarios to ensure we maximize liquidity through this unprecedented crisis, including stress testing downside assumptions and contemplating various recovery trajectory.

Based on what we know today about the COVID-19 crisis, we believe we have sufficient liquidity. But should conditions warrant, we have additional steps we could take to further bolster liquidity. The uncertainty surrounding the duration and extent of the COVID-19 crisis, including its impact on our company, employees, customers and business partners, makes it uniquely challenging to accurately forecast our future financial performance. As a result, on April 20, we withdrew our annual financial guidance that was initially provided on February 25, 2020. Our near-term focus is on maximizing financial and operational flexibility and preserving liquidity. We will continue to take the steps necessary to weather the current crisis. And as we learn more each week, we will adapt and evolve our business models and financial scenarios as markets continue to open.

I'd like to reiterate Charles' thanks to our associates, business partners and many other stakeholders who are working collaboratively with us to navigate this environment. Through our collective efforts, we are making progress and building momentum and the ingenuity of the team builds my confidence for the future.

Thank you all for your time this morning. With that, I will turn the call back to Nancy Taylor for a final comment, and then we will ask the moderator to open the call for questions.

--------------------------------------------------------------------------------

Nancy M. Taylor, Lumber Liquidators Holdings, Inc. - Independent Chairman [6]

--------------------------------------------------------------------------------

Thanks, Nancy. I would also like to share another personnel change. Lee Reeves, the company's Chief Legal Officer, has left the company as of May 27. On behalf of the Board, I want to thank Lee for his contributions over the last few years and wish him much success in his future endeavors.

--------------------------------------------------------------------------------

Nancy A. Walsh, Lumber Liquidators Holdings, Inc. - CFO [7]

--------------------------------------------------------------------------------

Operator, we would now like to open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Our first question comes from the line of John Baugh with Stifel.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

--------------------------------------------------------------------------------

Congrats on the changes and improvements in Q1. I wanted to go to the brand. And I guess I'm not 100% clear exactly where you are in the brand transition. And I'm curious what your learnings have been on the historical brand? What you're learning about the new name? And sort of what the plans are and possibly cost and timing of transitioning the brand going forward?

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [3]

--------------------------------------------------------------------------------

John, thanks for your question. Yes. So we started this journey, John, pretty shortly after I joined the company back in 2018, and we went out and did a lot of detailed survey work with both our Pro customers and our DIY customers as well as customers who've never shopped us to understand the attitude towards Lumber Liquidators and the rational connection between what we do from a flooring perspective and our brand. And as you can imagine and the reason we're leaning into this strategy is there was a pretty big disconnect. And so we recognize that brand changes are not going to happen overnight. They have to be very planful. But it's more than just -- and I think this is an important point, it's more than just changing our name. It's how we're going to operate as a company, how our teams are going to portray our brand, how we train our teams, how we focus on being experts in the hard flooring business, it has translated into the repositioning of our creative positioning as a brand which has been significant, particularly with our move online and how we've been able to position our brand online.

So from a from a timing perspective, you won't see any material costs associated with the brand transition from a structural perspective in 2020. We are doing a migration from an advertising standpoint that started last year with llflooring.com, and now it has transitioned to "Lumber Liquidators is now LL Flooring", and that will continue through the rest of this year. And later in the year, we will talk about some structural testing that we will be doing. And again, on a frequent basis, we're gaining feedback from customers and looking at the attitudes towards the brand.

We do believe that as customers who have experienced the brand and are delighted with our experience, the 5-star ratings that we get consistently. By repositioning the name to be completely relevant with what we do. Longer term, particularly with the obviously dramatic migration to online and digital, which is even more accelerated, obviously, through the crisis. And we don't know where the consumer behavior is going to end up after the crisis, but clearly, they have voted to move online significantly. When they're doing searches, and we want to be highly relevant. When they're doing searches for flooring, we see this as a way for us to reposition and be successful in terms of how we're going to drive growth into the future. So hopefully, John, that got to the crux of your question.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

--------------------------------------------------------------------------------

That's helpful. And if I could follow-up on the gross margin, which was outstanding in Q1. And maybe a simple question of sort of the sustainability of that going forward, understanding that the tariff exclusion may change things out into the future. But could you discuss in particular, without doing the April promotion, how gross margin looks in Q2 and beyond?

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [5]

--------------------------------------------------------------------------------

Yes, John, thanks. Yes. So I'm not going to be specific around gross margin performance in the quarter. What I will tell you is that, again, we started out with the realignment of our teams. We invested in a sourcing team and they've done tremendous work around alternative country sourcing, which will continue regardless of the abatement of tariffs. And our merchant teams working with our vendors on realigning through the line review process to make sure that we are acquiring our products, both at the right cost structure, but also making sure that from a compliance standpoint, we are absolutely getting the right quality of product into the marketplace.

And so I think this was a muscle that was missing previously at LL Flooring. And we've brought in some folks who are great merchants and great sourcing teams, and we will continue to work as we continue to broaden strategic supplier partnerships that are working with us to continue to work on the profit side of our business. Okay? Thanks, John.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Laura Champine with Loop Capital Market.

--------------------------------------------------------------------------------

Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [7]

--------------------------------------------------------------------------------

Congratulations, Charles. Happy to see your appointment today. I have a question about sort of the more controllable part of your business. What should we be thinking of in terms of SG&A rate declines? And how are you making decisions about what to do on the operating expense line?

--------------------------------------------------------------------------------

Nancy A. Walsh, Lumber Liquidators Holdings, Inc. - CFO [8]

--------------------------------------------------------------------------------

Laura, this is Nancy. We have spent a tremendous amount of time even prior to the crisis, working on rationalizing our expenses and being able to work on our efficiency throughout the organization. As a result of the COVID crisis as that hit, we have obviously accelerated that program. As I mentioned in my prepared remarks, we have gone through and reduced significantly both the operating as well as our tax expenditures as a result of the CARES Act by about $20 million. We've deferred another $20 million worth of payables. And I will mention that, that doesn't have kind of a balloon payment at the end. That is something that is structured over a period of time that we feel is very flexible and will not essentially kick down the road, the impact of what we've seen in the last 90 days.

In addition, we are still waiting about $23 million of the tariff exemption funding to come through, and we've taken steps with our banks to extend and expand our credit facility. So anything that has been discretionary in terms of capital or OpEx, we've taken a hard look at that and either deposited or eliminated it. And this has given us an opportunity to really take a look at the business and decide how we need to operate in the new normal going forward? And where do we want to continue to make investments and where do we want to pause the investments.

So I think we're seeing with the impact on our liquidity that we were in a good place, and we're able to control the expenses, but still be able to move the business forward and deal with the current crisis.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

--------------------------------------------------------------------------------

Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [10]

--------------------------------------------------------------------------------

My first question on gross margin, are -- can you provide any more granularity on tariff refund or rebate? And if not, the amount just directionally versus what we knew from the last quarter?

--------------------------------------------------------------------------------

Nancy A. Walsh, Lumber Liquidators Holdings, Inc. - CFO [11]

--------------------------------------------------------------------------------

Well, in Q4, we identified there was $27 million of tariff exemption funding that we would do from a reimbursement perspective. Through April -- or through May, excuse me, we received about $4 million of that. And the delay is mostly as a result of the COVID crisis and the sheer number of tax cheques that we're having to be mailed out, and it's the same organization that kind of manages this. So that has slowed down a little bit. You'll remember at Q4, we had expected to receive that within the first half of the year. We've now extended that still expect to receive it before the end of 2020, but we could see delays in it.

So there's $23 million still coming, and we do get interest as the payments continue to be delayed, so that will increase. We also had a secondary tariff exemption that was applied that's certainly not as significant as that. But you'll see on the balance sheet, we still have about $27 million expected as receivable.

--------------------------------------------------------------------------------

Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [12]

--------------------------------------------------------------------------------

Got it. And what you received, the $4 million, is that cash? And is that the same as being -- as what is being recognized on the income statement?

--------------------------------------------------------------------------------

Nancy A. Walsh, Lumber Liquidators Holdings, Inc. - CFO [13]

--------------------------------------------------------------------------------

It's just pure cash. At this point, we -- at the end of Q4, we made the adjustments historically going back, adjusted the inventory, took that P&L benefit in Q4, and we've had some of the inventory as it flows through. We're seeing additional impact. But most of that came through the end of last year, this is just the cash portion that we're expecting to receive now.

--------------------------------------------------------------------------------

Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [14]

--------------------------------------------------------------------------------

Got it. Okay. And then the follow-up, I guess, 2 parts. One, this is just more tactical, the -- in states that have been open longer, if you can give any color, if there's any differentiation among performance versus states that are just opening? And then for Charles, just thinking about strategic initiatives, we've heard you discuss a lot of them over time, even up until this point. Anything changed, anything expedite anything that you pulled back on?

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [15]

--------------------------------------------------------------------------------

Yes, Simeon. What I will say on the states, and I think you've heard this on a number of calls this week. States like California and New York, obviously, where the virus and the lockdown became a lot more severe, we obviously saw a larger impact than some of the other geographies. And as clearly, as we're opening up our showrooms again. And as we said, we're up to about 60% fully open. We're seeing some areas that went in early, like the Northwest Pacific come back more aggressively. So there is regionalization, that is absolutely an impact. And I think many retailers are seeing the same things from a ZIP code perspective in terms of where the impact has been.

On the strategic initiatives, we've been very focused for the last 5 months, Simeon, on working collectively with our Board and with management team on building out both the strategy and the 3-year plan. I will tell you a couple of just enhancements that I don't think we've talked about. So when we promoted Damien to be a leader of our retail and commercial sales, that's actually a pretty significant title change from how we were structured before. And it's a recognition of the work and the emphasis that we're going to have in terms of how we integrate our selling channels to drive sales. And so Damien and the team, we recently hired a new VP of Commercial Sales, who will report directly to Damien, has over 20 years of experience from Grainger in the B2B space. So we're going to enhance our capabilities on building out both our Pro relationships, but our Pro strategy and capability. Clearly, the -- and again, Simeon, unknown how the consumer is going to behave, we are going to continue to be intensely focused on our e-commerce omnichannel strategy. We've been very pleased over the last few months on both the -- where we've seen customer migration, but more importantly, all the work that, that team has done over the last 18 months has driven significant increase and return. As we said, 20% of our sales were running through e-commerce as the retail stores started to decline.

The other one, I think we probably haven't talked about enough, right? It's really our people agenda and our culture. A performance-driven culture that's going to have accountability, aligned incentives and a real focus on delivering results. And so while the core issues that we've talked about before, about making sure we're a merchandising-driven company with trend-right assortment to make sure that the marketing effectiveness with -- how we deal with the balance of online and offline and continue to improve our cost efficiency of our marketing spend, we'll continue to lean into those.

Obviously, we've talked about restructuring from a profitability perspective and what we need to do with the operating model to continue to increase profits. But this company is focused on delivering a very personalized experience to customers with a pretty complex flooring transaction. And so ensuring that we've got bench strength throughout our field organization, whether it's at a divisional vice president level, our regional manager level, through this crisis, we made a commitment that we will not going to furlough a single store manager, and we have not done that to date. Because those folks are the ones that deliver for us every day.

So I believe we've got a very focused strategy, a very focused number of initiatives, and we're going to ensure that through our organization, we're staying focused on those initiatives, while in the short term, being highly flexible, particularly around liquidity.

At the end of the day, I think it -- we are managing our business month-to-month in the short-term because of the kind of variability that we are all seeing, it's very difficult for folks to forecast what's going to happen in Q4 based on potential impact of the virus. But we're going to stay focused on our road map, and I believe we've got good -- I don't believe we do have good alignment both between the Board and the management team on the direction that we're going to go. So I appreciate you answering that -- asking that really important question, Simeon.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question comes from the line of Seth Basham with Wedbush Securities.

--------------------------------------------------------------------------------

Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [17]

--------------------------------------------------------------------------------

Congrats Charles on your new appointment.

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [18]

--------------------------------------------------------------------------------

Thanks, Seth.

--------------------------------------------------------------------------------

Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [19]

--------------------------------------------------------------------------------

My question is more of tactical in nature as it relates to what's happened in Q2 to date. You spoke about some regional performance, but can you provide some color on how the Pro relative to the DIY side of the business is doing, first of all?

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [20]

--------------------------------------------------------------------------------

Yes. So Seth, on the DIY side, customer behavior has, as we've stated, obviously, migrated pretty significantly online. And we've been really happy that the investments that we've made, both with our online tools and even beginning with the in-store video is helping customers even in a remote environment, being able to continue to execute on their transactions. The third tranche of our business is install, and I'll link that back to Pro. Obviously, we saw a pretty dramatic decline of installers, customers either, one, able to get installs into their home because of local audiences or just out of an abundance of caution of not wanting to have folks in their home. But over the last few weeks, we have seen an improvement in the number of requests in the home measurement, which is a future indicator of potential demand. But we've been pleased to see that our Pro business has lag on the recovery from DIY. And again, I think as local municipalities start to open back up, permits start to get resubmitted for jobs. We're going to track that at a regional level. And our regional managers through this crisis have actually while they've not been able to travel, been intimately involved in connecting and reaching out with Pros to see how we can help them, where they need help in terms of driving their business.

So we're watching this literally on a daily basis down to the regional level to be clear to see where we need to put resources. I will say that our store field organization has done an amazing job from an expense control. If you can imagine, they're comping positive one day and then the market becomes extremely negative, and they are making sure that they keep that balance of expense control, along with staying connected with our customers.

Our Pros are going to be our long-term relationship, not transactional customers, and we're going to continue to help them as the economy starts to recover.

--------------------------------------------------------------------------------

Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [21]

--------------------------------------------------------------------------------

That's helpful color. And then secondly, changing gears and back to the discussion around the brand transformation. Can you quantify what you expect to spend to change the brand across all your stores for through balance of this year, please?

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [22]

--------------------------------------------------------------------------------

Yes. So Seth, for the balance of this year, there will be very little expense related to changing capital or operating expenses. And we will come back to the market later in the year and talk in more detail of the next tranche of this work, but there will be minimal impact from an expense or capital perspective this year.

--------------------------------------------------------------------------------

Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [23]

--------------------------------------------------------------------------------

Okay. So store sign changes are likely on hold until 2021?

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [24]

--------------------------------------------------------------------------------

No. Seth, I think we've all got to be prudent and conservative. And we're on our journey to test our way through this. And again, we will have minimal capital operating expense that you will see in the P&L this year from a signage perspective on the stores.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Peter Keith with Piper Sandler.

--------------------------------------------------------------------------------

Robert Adam Friedner, Piper Sandler & Co., Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

It's actually Bobby Friedner on for Peter. Just wanted to ask around the comp trends. If you could give a little more detail as to the changes you've seen from April to May. And then within May is -- the sequential improvement you're seeing, has it been pretty consistent or is there still a good degree of variability in results?

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [27]

--------------------------------------------------------------------------------

Yes. Thanks for the question. So we gave you the color about where we were performing through, obviously, the end of the quarter and where we were through the end of May. So we've been pleased with the sequential improvements that we're seeing. Again, we've talked about regionally as markets start to open up, as you've seen with other retailers, the transactions begin to come back. And we've given you color around what's happening with the Pro and the DIY and the Install business. So I'm not going to give specific numbers. But again, we've been pleased with the sequential improvement that we're seeing. But I do want to caveat that these are still very uncertain times and the impact of the virus longer term, not a predictor, right, of where the back half of the year may be. But again, I think that probably gives you a sense of where we're trending today.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes our time for questions. I'll turn the floor back to Mr. Tyson for any final comments.

--------------------------------------------------------------------------------

Charles E. Tyson, Lumber Liquidators Holdings, Inc. - President, CEO, Chief Customer Experience Officer & Director [29]

--------------------------------------------------------------------------------

Thank you, operator. First, on behalf of the Board and myself, I would like to thank Nancy Walsh, our CFO, for all the help, energy and focus during this leadership transition over the last several months, and she has been a great addition to the LL Flooring team.

We continue to execute our transformation plan focused on our 3 pillars of improving our customer experience, driving traffic and transactions in our stores and online and improving profitability. Through this focus, we will accelerate our penetration with Pro, continue to evolve our digital presence, revitalize our brand and improve profitability through both margin-enhancing and cost-efficiency efforts.

The progress we've made and the results we've already begun to see give me confidence in our future. I'd like to thank again all of our associates who have been making amazing sacrifices for our company during this very difficult time. And to our vendors and other stakeholders, who are partnering with us to creatively navigate these unprecedented times.

I wish everyone good health and safety, and we look forward to updating you on our performance next quarter. Have a great day. Thank you.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.