Financial Data and Key Metrics Changes - Net sales for Q2 2022 were $299 million, a decrease of $2.4 million or 0.8% compared to Q2 2021, attributed to a 0.8% decrease in net merchandise sales and a 1.1% decrease in net service sales [23] - Adjusted operating income was $5.9 million, down from $16.9 million in the prior year, with an adjusted operating margin of 2%, a decrease of 360 basis points from Q2 2021 [26] - Adjusted earnings for Q2 2022 were $3.7 million, down $8.5 million compared to Q2 2021, resulting in adjusted earnings per diluted share of $0.13 compared to $0.41 in the prior year [27] Business Line Data and Key Metrics Changes - Comparable store sales decreased by 3.1% in Q2 2022 compared to Q2 2021, but increased by 6.9% on a three-year stack basis, indicating improvement from pre-COVID levels [24] - Sales to Pro customers showed double-digit growth, highlighting a successful strategy in targeting this segment [7] Market Data and Key Metrics Changes - The company reported a 22% decrease in transaction count compared to the same period in 2021, largely reflecting decreased sales to consumers [23] - The company has reduced its imports from China to 12%, down from 22% a year ago, indicating a shift towards a more diverse global sourcing strategy [11] Company Strategy and Development Direction - The company is focused on six strategic pillars to drive long-term growth, including growing sales to Pro customers, accelerating new store openings, and improving customer experience [20] - The company plans to open between 20 to 22 new stores in 2022, having already opened 13 in the first half of the year [15] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the consumer spending outlook due to inflation and rising interest rates, indicating potential challenges in achieving positive comparable store sales for the full year [12] - Despite near-term challenges, management remains optimistic about long-term trends in home remodeling and demand for hard surface flooring [13] Other Important Information - The company has a strong balance sheet with total liquidity of $187 million and has rebuilt inventory levels to $359 million [9][29] - Adjusted gross profit for Q2 2022 was $108 million, with an adjusted gross margin of 36.1%, down from 37.4% in Q2 2021, primarily due to higher material and transportation costs [25] Q&A Session Summary Question: What caused the sales outlook to lower? - Management noted headwinds in the consumer segment, particularly DIY, due to inflation and a shift in spending towards leisure and travel [34] Question: Is the sales outlook more forward-looking? - Management confirmed that the cautious outlook reflects external macroeconomic conditions rather than immediate trends [35] Question: How is market share performing? - Management expressed satisfaction with progress in the Pro business and noted that consumer headwinds have offset some benefits [38] Question: Will the strategy change if traction with high-service customers is insufficient? - Management stated that they will continue to invest in the high-service segment while not abandoning the DIY market [42] Question: Are gross margins in line with expectations? - Management indicated that while higher costs were anticipated, they were able to offset some through pricing and sourcing strategies [46] Question: Is there resistance to raising prices? - Management affirmed confidence in their competitive pricing position and noted that customers are not trading down despite inflation [48]

PART I – FINANCIAL INFORMATION [Item 1. Condensed Consolidated Financial Statements and Supplementary Data](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20and%20Supplementary%20Data) Presents the unaudited condensed consolidated financial statements as of June 30, 2022, including key statements and explanatory notes Condensed Consolidated Balance Sheets Total assets grew to $641.3 million, driven by a $104.4 million inventory increase funded by cash reduction and new debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and Cash Equivalents | $5,032 | $85,189 | | Merchandise Inventories | $358,804 | $254,385 | | Total Current Assets | $389,790 | $359,828 | | **Total Assets** | **$641,260** | **$605,892** | | **Liabilities & Equity** | | | | Accounts Payable | $88,954 | $63,464 | | Credit Agreement | $15,000 | $0 | | Total Liabilities | $367,991 | $333,771 | | Total Stockholders' Equity | $273,269 | $272,121 | | **Total Liabilities and Stockholders' Equity** | **$641,260** | **$605,892** | Condensed Consolidated Statements of Income and Comprehensive Income Q2 2022 profitability declined sharply, with net income falling 77.2% to $2.7 million on slightly lower sales Q2 2022 vs Q2 2021 Income Statement (in thousands, except per share) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total Net Sales | $298,957 | $301,384 | | Gross Profit | $106,750 | $112,730 | | Operating Income | $4,663 | $16,614 | | Net Income | $2,736 | $11,989 | | Net Income per Share—Diluted | $0.09 | $0.41 | Six Months 2022 vs 2021 Income Statement (in thousands, except per share) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total Net Sales | $577,989 | $584,834 | | Gross Profit | $210,829 | $228,322 | | Operating Income | $9,717 | $29,720 | | Net Income | $6,773 | $22,611 | | Net Income per Share—Diluted | $0.23 | $0.77 | Condensed Consolidated Statements of Cash Flows Net cash used in operations was $76.0 million in H1 2022, a reversal from prior year, mainly due to a large inventory build-up Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(75,982) | $53,334 | | Net Cash Used in Investing Activities | $(11,564) | $(7,378) | | Net Cash Provided by (Used in) Financing Activities | $7,389 | $(103,502) | | **Net Decrease in Cash and Cash Equivalents** | **$(80,157)** | **$(57,546)** | - The significant use of cash in operations was mainly due to a **$106.0 million investment in merchandise inventories**, compared to a $17.6 million source of cash from inventories in the prior year[17](index=17&type=chunk) Notes to Condensed Consolidated Financial Statements Notes detail the business model, accounting policies, share repurchases, credit facility, and significant legal contingencies - The company operates as a single segment, multi-channel specialty retailer of hard-surface flooring with **437 stores** in 47 U.S. states as of June 30, 2022[20](index=20&type=chunk) Sales Mix by Product Category (Six Months Ended June 30) | Product Category | 2022 % of Sales | 2021 % of Sales | | :--- | :--- | :--- | | Manufactured Products¹ | 48% | 46% | | Solid and Engineered Hardwood | 24% | 26% | | Moldings and Accessories | 15% | 15% | | Installation and Delivery Services | 13% | 13% | ¹Includes engineered vinyl plank, laminate, vinyl and tile. - In February 2022, the board authorized a **$50.0 million share repurchase program**; during Q2 2022, the company repurchased 571,332 shares for $7.0 million, with $43.0 million remaining[40](index=40&type=chunk) - The company has a **$200 million Revolving Credit Facility** maturing in April 2026; as of June 30, 2022, $15 million was outstanding, with $181.9 million available[46](index=46&type=chunk)[49](index=49&type=chunk) - The company is subject to various legal proceedings, including antidumping and countervailing duties (AD/CVD) on wood flooring from China, which resulted in a **$1.1 million liability in Q2 2022**[56](index=56&type=chunk)[78](index=78&type=chunk)[81](index=81&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management analyzes Q2 2022 performance, highlighting decreased sales and margins due to cost pressures and softer consumer demand Second Quarter Financial Highlights Q2 2022 saw a 0.8% net sales decrease, a 3.1% comparable store sales decline, and significantly compressed margins Q2 2022 Key Performance Indicators | Metric | Q2 2022 | Change vs. Q2 2021 | | :--- | :--- | :--- | | Net Sales | $299.0M | -0.8% | | Comparable Store Sales | -3.1% | N/A | | Gross Margin | 35.7% | -170 bps | | Adjusted Gross Margin (non-GAAP) | 36.1% | -130 bps | | Operating Margin | 1.6% | -390 bps | | Adjusted Operating Margin (non-GAAP) | 2.0% | -360 bps | | Diluted EPS | $0.09 | -$0.32 | | Adjusted EPS (non-GAAP) | $0.13 | -$0.28 | Results of Operations Weaker consumer demand drove a 0.8% sales decline, while higher costs compressed gross margin and operating income - Net sales for Q2 2022 decreased 0.8% to $299.0 million, with **comparable store sales down 3.1%**, attributed to lower consumer spending partially offset by record sales to Pro customers[106](index=106&type=chunk)[107](index=107&type=chunk) - Gross margin for Q2 2022 **decreased by 170 basis points to 35.7%**, primarily due to a collective impact of more than 1,000 basis points from higher material and transportation costs[108](index=108&type=chunk) - SG&A expenses for Q2 2022 increased by $6.0 million to $102.1 million, driven by investments for long-term growth, higher advertising, and personnel costs[111](index=111&type=chunk) Liquidity, Capital Resources and Cash Flows Total liquidity stood at $187 million, with operating cash flow used for inventory build-up and capital expenditures - **Total liquidity was $187 million** as of June 30, 2022, consisting of $5.0 million in cash and $181.9 million in availability under the Revolving Loan[130](index=130&type=chunk) - Net cash used in operating activities was **$76.0 million** for the first six months of 2022, largely due to a $106.0 million increase in inventory purchases[130](index=130&type=chunk) - The company plans for **$23 million to $25 million in capital expenditures** for 2022, which includes opening 20 to 22 new stores[131](index=131&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) The company's primary market risk exposure is interest rate fluctuations on its variable-rate credit facility - The company is exposed to interest rate risk from its variable rate borrowings; with **$15 million outstanding**, a hypothetical 1% rate increase would increase annual interest expense by $150,000[139](index=139&type=chunk) [Item 4. Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls during the quarter - Based on an evaluation as of the end of the quarter, the Chief Executive Officer and Chief Financial Officer concluded that the **Company's disclosure controls and procedures were effective**[140](index=140&type=chunk) - **No changes in internal control over financial reporting** occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[140](index=140&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings.) Information regarding legal proceedings is incorporated by reference from Note 7 in the condensed consolidated financial statements - Details on legal proceedings are provided in **Note 7** to the condensed consolidated financial statements[141](index=141&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors.) There are no new risk factors presented in this report, with reference made to the 2021 Annual Report on Form 10-K - The company directs investors to review the risk factors detailed in its **Form 10-K for the year ended December 31, 2021**[142](index=142&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) The company repurchased 571,332 shares for $7.0 million in Q2 2022, with $43.0 million remaining under the buyback program Share Repurchase Activity for Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | Total Purchased in Program | Max Value Remaining in Program | | :--- | :--- | :--- | :--- | :--- | | April 2022 | 106,000 | $14.13 | 106,000 | $48,506,000 | | May 2022 | 465,000 | $11.83 | 571,000 | $43,000,000 | | June 2022 | 0 | N/A | 571,000 | $43,000,000 | | **Total** | **571,000** | **$12.25** | **571,000** | **$43,000,000** | [Item 3. Defaults Upon Senior Securities](index=46&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities.) None reported - None[145](index=145&type=chunk) [Item 4. Mine Safety Disclosures](index=46&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) None reported - None[145](index=145&type=chunk) [Item 5. Other Information](index=46&type=section&id=Item%205.%20Other%20Information.) None reported - None[145](index=145&type=chunk) [Item 6. Exhibits](index=46&type=section&id=Item%206.%20Exhibits.) Lists exhibits filed with the Form 10-Q, including compensation agreements and required officer certifications - Exhibits filed include Restricted Stock Unit and Award Agreements for non-employee directors, and **Sarbanes-Oxley Section 302 and 906 certifications**[148](index=148&type=chunk)

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