LL Flooring (LL) - 2023 Q4 - Annual Report

Part I Business Overview LL Flooring is a leading specialty retailer of hard and soft surface flooring, operating 437 stores with an omnichannel model and direct global sourcing - LL Flooring is a specialty flooring retailer with 437 stores in North America as of year-end 2023[11] - The company offers a wide selection of hard-surface floors and expanded into carpet offerings in 2023[11][15] - The business model combines local store service with national chain value, targeting both consumers and professionals ('Pros')[11][14] - In 2023, product sourcing was diversified: 47% from North America, 22% from Asia (ex-China), 16% from Europe, 11% from China, and 4% from South America[16] - The company operates three primary distribution centers in Virginia, California, and a new facility opened in Dallas, Texas in September 2023[17][18] - As of December 31, 2023, the company had approximately 2,100 associates, with 71% working in stores[28] Risk Factors The company faces significant risks from reduced consumer spending, supply chain disruptions, intense competition, and IT vulnerabilities - Business operations are at risk from reduced consumer spending, failure to execute key growth initiatives (CRM, carpet expansion), and challenges in retaining qualified associates[37][38][39] - The company relies on international suppliers, exposing it to risks from tariffs (including Section 301), political instability, and trade regulations like the Uyghur Forced Labor Prevention Act (UFLPA), which has caused detention of PVC-containing products[49][50] - The flooring industry is highly competitive and fragmented, challenged by home improvement chains, specialty retailers, and online companies, with low brand awareness for 'LL Flooring' post-rebranding[53][54] - Economic risks include cyclicality in the home flooring industry tied to remodeling and new construction, and the inability to access capital through its Revolving Credit Facility if covenants are not met[55] - Information technology risks include potential disruptions to management information systems like the new CRM, cybersecurity threats, and compliance with evolving data privacy laws such as the CCPA[57][58][59] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[62] Cybersecurity Cybersecurity is integrated into enterprise risk management, with Board oversight and no material threats identified - Cybersecurity is a principal element of the enterprise risk management program, with policies benchmarked against the NIST Cybersecurity Framework[62] - The Audit Committee of the Board of Directors provides direct oversight, receiving quarterly updates from management, including the CISO and CTO[64] - The company's CISO has 28 years of IT experience, with ten in cybersecurity, leading a team responsible for strategy, policy, and incident response[64] - No current cybersecurity threats are believed to be reasonably likely to have a material effect on the company's financial condition or operations[63] Properties The company operates 437 leased stores and owns one distribution center while leasing two others - The company operated 437 stores in 47 states as of February 26, 2024, with all store locations being leased[67][66] - The company owns a 1 million sq. ft. distribution center in Virginia and leases approximately 950,000 sq. ft. of distribution space across facilities in California and Texas[66] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 10 of the financial statements - Details on legal proceedings are provided in Note 10 to the consolidated financial statements[68] Mine Safety Disclosures This item is not applicable to the company - None[71] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE, with no dividends paid, and has significantly underperformed market indices - The company's common stock (Symbol: LL) had 30,839,051 shares outstanding as of February 28, 2024[70] - The company has a share repurchase program with $43.0 million remaining authorized as of December 31, 2023, with no shares repurchased in 2023[73] - The company has never paid dividends on its common stock and does not anticipate doing so in the near future[75] Stock Performance vs. Indices (2018-2023) | | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | |:---|---:|---:|---:|---:|---:|---:| | LL Flooring Holdings, Inc. | 100.00 | 102.63 | 322.90 | 179.31 | 59.03 | 40.97 | | NYSE Composite | 100.00 | 122.32 | 127.70 | 150.90 | 133.50 | 148.17 | | S&P Retail Select Industry Index | 100.00 | 112.09 | 157.02 | 222.62 | 150.10 | 179.50 | Management's Discussion and Analysis of Financial Condition and Results of Operations Challenging macroeconomic conditions led to an 18.5% net sales decrease and significant net loss in 2023, with improved liquidity - The company is navigating a difficult macroeconomic environment characterized by low consumer confidence, inflation, and high interest rates, which has negatively impacted sales[81][86] - Key strategic initiatives include growing the Pro business, driving engagement with a new CRM system, increasing brand awareness, product innovation (including carpet expansion), and ensuring a consistent customer experience[81][85] - In 2023, the company incurred $6.3 million in incremental expenses related to UFLPA customs detentions of vinyl flooring products from Asia[83] - The company achieved $12.0 million in cost savings in 2023 as part of a strategic review of its cost structure initiated in 2022[81] Results of Operations Net sales decreased by 18.5% to $904.7 million in 2023, leading to a significant operating and net loss Financial Performance Summary (2023 vs. 2022) | Metric | 2023 ($M) | 2022 ($M) | % Change | |:---|:---|:---|:---| | Total Net Sales | $904.7 | $1,110.7 | (18.5)% | | Gross Profit | $322.7 | $401.2 | (19.6)% | | Gross Margin | 35.7% | 36.1% | -40 bps | | Operating Loss | ($80.8) | ($11.7) | 589.2% | | Net Loss | ($103.5) | ($12.1) | 756.7% | | Diluted Loss Per Share | ($3.59) | ($0.42) | N/A | - Net sales decreased by $205.9 million (18.5%) in 2023, with comparable store net sales down 19.6%, attributed to lower transaction counts for both Pro and Consumer channels amid macroeconomic headwinds[90] - Gross margin was negatively impacted by a $10.8 million unfavorable antidumping duty rate change and $5.4 million in UFLPA-related vinyl product costs; adjusted gross margin increased to 37.5% from 36.1% in 2022 due to lower tariff costs[91] - SG&A as a percentage of sales increased to 44.6% from 37.2% due to sales deleverage, despite a $9.4 million decrease in absolute SG&A dollars[94] - The income tax expense increased by $14.9 million to $13.4 million, primarily due to recording a valuation allowance on net deferred tax assets because the company was in a three-year cumulative loss position[101] Liquidity, Capital Resources and Cash Flows Total liquidity was $118.2 million at year-end 2023, with operating cash flow significantly improving due to inventory and accounts payable management - Total liquidity was $118.2 million at year-end 2023, consisting of $8.8 million in cash and $109.4 million in credit availability[104] Cash Flow Summary (in thousands) | Activity | 2023 ($K) | 2022 ($K) | |:---|---:|---:| | Net Cash Provided by (Used in) Operating Activities | $21,285 | ($116,709) | | Net Cash Used in Investing Activities | ($17,027) | ($21,983) | | Net Cash (Used In) Provided by Financing Activities | ($6,286) | $64,303 | - The $138.0 million year-over-year improvement in operating cash flow was driven by working capital improvements, particularly a decrease in merchandise inventory and an increase in accounts payable[107] - Total merchandise inventories decreased by 20.2% from $332.3 million in 2022 to $265.3 million in 2023, as purchasing was scaled back to align with sales trends[108][110] Critical Accounting Policies and Estimates Key accounting policies involve significant judgments in revenue recognition, lease accounting, and the valuation of deferred tax assets - Net sales are recognized when the customer takes possession of goods or when services are rendered; an allowance for sales returns is estimated based on historical trends[113] - Lease accounting (ASC 842) requires the use of an estimated incremental borrowing rate to calculate right-of-use assets and lease liabilities, which involves significant judgment[114][115] - A full valuation allowance of $36.6 million was recorded against deferred tax assets as of December 31, 2023, as management concluded it is more likely than not that these assets will not be realized due to a cumulative three-year loss position[116] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable rate borrowings, with no hedging currently in place - The company is exposed to interest rate risk from its variable rate borrowings under its Credit Agreement[118] - With $66.0 million outstanding on the Revolving Credit Facility, a hypothetical 1% increase in interest rates would increase annual interest expense by approximately $0.7 million[118] Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, including balance sheets, income statements, and cash flow statements, with detailed notes Reports of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the financial statements and internal controls, identifying lease accounting as a critical audit matter - Ernst & Young LLP provided an unqualified opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position of the company[123] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[131] - The audit identified the estimation of incremental borrowing rates for operating lease assets and liabilities as a critical audit matter, requiring complex auditor judgment[128] Consolidated Financial Statements The 2023 statements show decreased total assets, increased liabilities, a $103.5 million net loss, and improved operating cash flow from inventory reduction Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2023 ($K) | Dec 31, 2022 ($K) | |:---|---:|---:| | Total Current Assets | $288,193 | $369,748 | | Total Assets | $535,574 | $613,953 | | Total Current Liabilities | $187,222 | $180,524 | | Total Liabilities | $378,264 | $357,872 | | Total Stockholders' Equity | $157,310 | $256,081 | Consolidated Statement of Operations Data (in thousands) | | 2023 ($K) | 2022 ($K) | 2021 ($K) | |:---|---:|---:|---:| | Total Net Sales | $904,746 | $1,110,679 | $1,152,344 | | Gross Profit | $322,713 | $401,163 | $440,042 | | Operating (Loss) Income | ($80,786) | ($11,722) | $52,686 | | Net (Loss) Income | ($103,494) | ($12,081) | $41,698 | Notes to Consolidated Financial Statements Notes detail accounting policies, credit facility, lease liabilities, a $36.6 million deferred tax valuation allowance, and legal contingencies - The company has a Revolving Credit Facility of up to $200.0 million, with $66.0 million outstanding and $109.4 million of availability as of December 31, 2023[177][178] - As of December 31, 2023, the company had total operating lease liabilities of $153.4 million[182] - A full valuation allowance of $36.6 million was recorded against net deferred tax assets due to a three-year cumulative loss position, making realization uncertain[204] - In 2023, the company recorded a $16.2 million expense ($10.7 million cost of sales, $5.5 million interest) due to a change in the antidumping duty rate for imports from 2012-2013[214] - The company has remaining accruals for legal settlements: $3.3 million for the Formaldehyde-Abrasion MDL and $11.6 million for the Gold Litigation (bamboo flooring), primarily for outstanding store-credit vouchers[210][211] Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[223] - Management concluded that internal control over financial reporting was effective as of December 31, 2023, an assessment audited and confirmed by Ernst & Young LLP[225] - There were no material changes in internal control over financial reporting during the fourth quarter of 2023[226] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the forthcoming 2024 annual meeting proxy statement[228] - The company has a Code of Business Conduct and Ethics that applies to all personnel and is available on its investor relations website[229][230] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 annual meeting proxy statement - Required information is incorporated by reference from the forthcoming 2024 annual meeting proxy statement[231] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the 2024 annual meeting proxy statement - Required information is incorporated by reference from the forthcoming 2024 annual meeting proxy statement[231] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the forthcoming 2024 annual meeting proxy statement[232] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2024 annual meeting proxy statement - Required information is incorporated by reference from the forthcoming 2024 annual meeting proxy statement[233] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed with or incorporated by reference into the annual report - The report includes the consolidated financial statements and Schedule II – Analysis of Valuation and Qualifying Accounts[234] - An index of exhibits is provided, listing key corporate documents, agreements, and certifications[235][236] Form 10-K Summary The company indicates that there is no Form 10-K summary - None[238]