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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

TOANO, Va., Nov. 6, 2019 /PRNewswire/ -- Lumber Liquidators (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.


 

 

Cision

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