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Text: Today, I am joined by Charles Tyson, our President and Chief Executive Officer; and Nancy Walsh, our Chief Financial Officer.
During today's conference call, management will be discussing results on an adjusted basis.
In addition, during today's call, we will be discussing our financial performance on both a one and two-year basis given that the second quarter of last year was severely impacted by COVID-19 closures.
Now, I am pleased to introduce, President and CEO, Charles Tyson.
We delivered strong second quarter sales and profitability growth, with comp sales up 31.3% versus last year and up 10% on a two-year stack basis.
A strong comp growth was driven both by increasing traction on our transformation initiatives as well as the reopening of the economy compared to the COVID-19 shut down in effect for much of the second quarter of last year.
We believe our second quarter sales could have been higher if not for the global supply chain disruption that are having widespread impact.
Second quarter operating margin of 5.5% was up 290 basis points versus the second quarter of last year and up 600 basis points on a two-year basis.
Underscoring the great work and execution of our merchant and sourcing teams to mitigate higher tariffs, materials and transportation cost, and the organization disciplined expense management.
On an adjusted basis, operating margin of 5.6% increased 280 and 440 basis points respectively versus the second quarter of '20 and 2019.
We were pleased to report diluted earnings per share of $0.41, which was up $0.32 versus 2020 and up $0.51 versus 2019.
Adjusted earnings per diluted share of $0.41 was up $0.31 versus 2020 and up $0.38 versus 2019.
Nancy will go into more details on the financial results during her remarks, including what we have done to strengthen our balance sheet and pay down all of that debt.
Taking a closer look at what drove affecting to a quarter sales, we were pleased with the increasing traction we're seeing from our investments and improving the customer experience.
These investments helped to grow our sales with pro, install and DIY customers.
First pros, growing our business to drove is a key component of our long-term growth strategy.
We primarily work with flooring focused products such as remodels, property managers, install and builders, and pros working in public spaces.
We were very pleased to report that our pro comp sales growth during the quarter exceeded total company comp sales growth on both a one and two-year basis.
We attribute the performance in pro sales growth to a combination of execution on our strategic pillar of improving the customer experience.
As well as achieving more balanced growth across each of the types of pro customers we serve due to the reopen of the economy.
We continue to build on the foundational program we launched in the third quarter of 2020 to create stronger relationships with pros and better understanding the business, so we can provide better service and support them as a true partner.
This relationship approach has been consistently reinforced for that field and it's beginning to drive meaningful result.
We were pleased with the results we are seeing from our dedicated outside pro account rep pilot.
And we continue to monitor this program throughout 2021.
Building on that in early June, we reconfigured our national account rep program, so that our inside sales reps are now better aligned geographically with the field, are now focused on building relationships with our pros and driving incremental growth.
In March 2021, we introduced everyday competitive pricing for pros.
And we allow pros to extend that pricing to their customers through a referral program.
This pricing and referral program is delivered by our dedicated web experience we launched for pros in April 2021.
The online experience also gets pros access to real-time inventory levels at nearby stores.
We've received very positive feedback on these two new important value drivers for pros and we're continuing to build awareness for these services.
We plan to continue to enhance the pro web experience with additional services in the months ahead.
We believe the combination of how we align and focus our sales organization to better serve the pro, combined with introducing new valuable services dedicated to the pro will help us build richer and deeper relationships and grow our business with these important customers.
In addition to our success with pros, our second quarter results were driven by a 107% increase in net services sales, which are largely comprised of installation sales.
The increase in installation sales versus last year primarily reflects consumers' comfort with having professional enter their homes compared to the severe shutdown due to COVID-19 in the second quarter of last year.
On a two-year basis, net service sales were up 10%, demonstrating the benefit from our investments in improving the installation customer experience.
We believe offering our customers a complete solution from inspiration to installation is a core competitive advantage for us.
We offer delivery and in-home installation services through select third party installers for customers who purchase outdoor.
We plan to grow our installation sales by attracting new customers and automating much of the installation experience to improve both the customers' experience and increase store productivity.
This automation started in the second quarter of 2020 when we launched an independent installer portal.
Using this tool, our installation partners and better manage schedules, financial, estimates and other workflow items.
This management tool helped many of our installers successfully grow their business while beyond their original expectation.
Building on that, in December 2020, we rolled out an in-store portal to enhance visibility to our customers installation projects, increase efficiency for our store associates and reduce turnaround time for our customers when quoting new jobs.
We plan to continue to add capabilities to the in-store portal to make it a seamless path and easiest possible could conduct installation business with us.
We also grew sales for DIY customers in the second quarter versus last year.
Our strategy to grow business with DIY customers is to deliver convenient, superior and high-touch guided shopping experience.
That's both affordable and accessible.
Buying flooring is a complex transaction.
We provide an end-to-end solution that starts with helping customers to select the floor itself for the underlayment and matching accessories.
And finally the installation services to complete a project.
Transformation initiatives supporting our DIY growth strategy include improving the customer experience in driving traffic and transactions.
More specifically, generating demand with a brand that represents quality, a guided experience and a trend right assortment.
Making it easy for retail customers to do business with us through engaging digital tools and educational online content, and creating a more convenient and engaging in-store customer experience.
In May, we launched our new Floor Love brand campaign, which repositions the LL Flooring brand to highlight our expertise and high quality trend right assortment.
The campaign reinforces our dedication to guiding customers through the entire flooring journey with the tag line from inspiration to installation, get the floors you love only at LL Flooring.
In July, we began the broad scale rebranding of our stores, which we expect to be largely completed by the end of 2021.
A new rebranded store format includes both new store experience and interior assignments that creates an appealing environment, which better showcases the quality of our products and the expertise of our people.
We also further enhanced our on-trend design product portfolio with the launch of new innovative wide width and water resistant flooring.
During the second quarter vinyl plank and solid hardwood were again our top performing categories.
We now offer more than 500 flooring SKUs that customers can easily discover through our e-commerce site including a completely virtual online experience or in our stores.
A digital experience is an important part of bringing more customers into the flooring journey.
During the second quarter, our web sales were down 32% versus the second quarter of last year when COVID shutdowns were at the peak.
But were up over 140% on a two-year stack basis.
Customers were very engaged with our Picture It!
and Floor Finder tools, which make it easy to imagine how the floor will look in their homes.
We plan to continue to enhance our digital experience, and drive traffic to our e-commerce site and stores through effective digital marketing.
What also making it more convenient to shop with us by expanding our store footprint.
During the second quarter, we opened four new stores bringing our total store count to 416 at the end of June.
In addition to opening traditional stores, we have further enhancing customer convenience and reinforcing our LL Flooring brand proposition by piloting a test of showroom-only locations.
We have three locations scheduled to open during the second half of 2021, and convenient and attractive retail corridors.
And we look forward to sharing more on these pilots on future calls.
Including the three showroom-only locations, we are on track to open 12 to 15 new stores in 2021.
Turning to our people and culture initiative, building a strong company culture is critically important and provides the foundation for all that we do for our customers.
We've embraced diversity, equity and inclusion as a core value.
And we're building a scalable program to ensure that these values permeate throughout the organization, including our recently completed diversity, equity and inclusion workshops.
We are also investing into attracting and retaining talent.
We're creating an attractive professional development and career path for our associates in order to establish LL Flooring as an employer of choice.
This includes new learning and development programs that are helping our associates to deliver both an outstanding customer experience as well as develop leadership skills that can take them to the next level within the company.
At the end of June, we launched a new program to increase our investment in our field team including increasing store staffing level and raising wages.
We believe all of these actions are critical components of our goal of building a high performing company culture that attracts and retains top talent and reinforces our value.
As we look ahead, we are encouraged by the traction we are gaining on the each of our strategic pillars; people and culture, improving the customer experience, driving traffic and transactions, and improving profitability.
We believe these pillars will enable us to win with customers and drive sustainable long-term growth.
From a consumer demand perspective, we remain encouraged by potential multi-year tailwind supported of consumer spending on hard surface flooring.
Additionally, existing home sales have been an important driver of flooring projects.
In June, the inventory of existing home sales to sale was $125 million representing a 2.6-month supply, which was a slight improvement from May.
We are monitoring tight how the inventory and affordability on continued existing home sales.
That said, the new more flexible work environment post COVID-19 may motivate more consumers to remodel their existing homes but they cannot move.
So, we are also monitoring the positive work from home impact of flooring remodeling projects.
In addition, we're monitoring the potential impact of a shift in consumer spending patterns in the second half of 2021.
Since May, the US is seeing consumers shift spending from durable goods to services as they prioritize lesser activities of a home improvement project.
In addition, inflationary pressure could cause consumers to postpone big ticket projects until affordability improves.
Finally, recently that delta variant of COVID-19 has caused an increase in cases in the US and abroad.
And we're monitoring the potential impact of this on suppliers as well as consumer demand and their willingness to have contracted in their homes.
Turning now to the supply chain.
During the second quarter, we believe we could have captured more sales if the inventories have been higher.
Our supply chain teams continue to do a great job bringing in new inventory and allocating it effectively across our stores to help our customers complete their flooring projects.
In addition, consistent with our strategy of being a leader in delivering a trend right assortment, we currently offer over 500 SKUs, and we'll continue to introduce new and innovative products sourced from across the world to help satisfy demand.
We believe our high level of service, selection and expertise is a key competitive advantage that allows us to win with customers in this challenging supply chain environment.
We expect the supply chain to remain constrained for the foreseeable future potentially continuing to limit inventory availability and increased materials and transportation costs.
From an international perspective, some of our sourcing partners across Southeast Asia have experienced temporary shutdowns due to COVID-19 outbreak, which limited production and delayed international shipping.
We also continue to navigate general limited international container availability and higher container costs.
Domestically, we do not expect the solid domestic hardwood supply to normalize until 2022 at the earliest.
We also continue to see availability constraints on domestic trucking, which is impacting our transportation costs.
We will look to continue to mitigate higher material and transportation costs through pricing and promotional strategy, while monitoring the market to inform and guide our decisions.
We will also continue to execute disciplined expense management, increasing efficiency and productivity while investing in our strategic growth pillars.
In summary, we demonstrated strong sales and profitability improvement in the second quarter on both a one and two-year basis.
Underscoring the traction we're gaining on our transformation initiatives, particularly pleased with pro sales growth outpacing our overall growth and we look forward to building on this momentum.
While the near-term operating environment poses challenges, we believe our transformation strategy will position us well for the long term.
In the second quarter, net sales of $301.4 million increased $71.1 million or 30.9% versus the second quarter of 2020 due to a 23.6% increase in net merchandise sales and 106.8% increase in net service sales.
We saw a 29.4% increase in our average ticket reflecting a greater mix of installation sales as well as higher merchandise average ticket and a 2% increase in transaction count compared to the same period in 2020.
When comparing to the second quarter of 2019, net sales increased 4.4% driven by 3.5% higher merchandise sales, and 10.4% higher net service sales.
Average ticket improved 11.3% and transactions were down 1.3%.
As Charles noted, second quarter 2021 comparable store sales increased 31.3% versus the second quarter of 2020 and 10% on a two-year stack basis.
We achieved these strong results despite continued supply chain constraints.
We feel good about the underlying demand for our flooring based on our customer deposits, and our teams are doing a great job managing customer expectations and inventory across our network to fulfill customer orders.
Turning now to gross profit.
Gross profit increased 27.7% in the second quarter of 2021 to $112.7 million from $88.3 million in the comparable period of 2020, an increase to 10% from $102.5 million in the second quarter of 2019.
Gross margin of 37.4% in the second quarter of 2021 compared to 38.3% in the second quarter of 2020 and 35.5% in the second quarter of 2019.
The 90 basis point decrease in gross margin versus last year primarily reflects higher tariffs on certain goods imported from China, and higher materials and inbound transportation costs, which were partially offset by pricing, promotions and sourcing strategies.
The second quarter of 2021 and 2020 had no non-GAAP adjustments to gross margin.
During the second quarter of 2019, gross margin included a $780,000 favorable adjustment for HTF duty categorization in prior periods.
When excluding that adjustment, gross margin was 35.2% for the second quarter of 2019.
The 220 basis point improvement in the second quarter of 2021 adjusted gross margin versus 2019 is particularly impressive given that the cost of merchandise sold on certain products imported from China included 25% tariff rates in the second quarter of 2021 compared to only 10% in the second quarter of 2019.
Turning now to SG&A.
SG&A expense for the second quarter with $96.1 million or 31.9% of sales leveraging 380 basis points compared to $82.3 million or 35.7% of sales in the second quarter of 2020.
SG&A expense for the second quarter of 2019 was $103.9 million or 36% of sales.
SG&A in each quarter included certain costs related to legal matters and settlements.
When excluding these items from all periods, adjusted SG&A expense for the second quarter of 2021 was $95.8 million compared to $81.8 million in 2020 and $98.1 million in 2019.
The higher adjusted SG&A expense in 2021 compared to 2020 reflected substantial adjustments made last year to address the COVID-19 pandemic.
When compared to 2019, the lower SG&A expense reflected more efficient marketing spend and disciplined expense management under the company's profit improvement initiative.
Even with the rigorous cost controls, we continue to invest in our growth initiatives that fuel our top line performance.
As a percent of sales, adjusted SG&A of 31.8% improved 370 basis points from 35.5% of sales in the second quarter of 2020 and improved 220 basis points from 34% of sales in the second quarter of 2019.
For the second quarter of 2021, we delivered operating income of $16.6 million, an increase of $10.6 million compared to $6 million in the second quarter of 2020 and an operating loss of $1.4 million in the second quarter of 2019.
Adjusted operating income in the second quarter of 2021 was $16.9 million, up $10.4 million from $6.5 million for the prior year period and up $13.3 million from 2019.
Adjusted operating margin for the second quarter of 2021 was 5.6%, up 280 basis points from 2.8% in the second quarter of 2020 and up 440 basis points from 1.2% in 2019.
The higher operating income and margin reflect good progress on our profit improvement initiatives with our merchant and sourcing teams implementing strategies to mitigate tariffs and higher transportation material costs.
Our marketing teams deploying more efficient and effective marketing spend and our overall organization driving disciplined expense management.
In the second quarter of 2021, we reported other expenses of $490,000 compared to other expense of $1.1 million for the three months ended June 30, 2020.
The decrease of $600,000 was driven by lower interest and fees on our credit agreement due to the amendment in April 2021 and the paying down of our outstanding debt during the second quarter of 2021.
In the second quarter of 2021, we recognized income tax expense of $4.1 million or an effective tax rate of 25.6% compared to income tax expense of $2.2 million or an effective tax rate of 45.7% for the second quarter of 2020.
The variability of our tax rate in 2020 reflects the impact of the CARES Act last year.
For the second quarter of 2021, net income increased by $9.4 million to $12 million compared to net income of $2.6 million for the second quarter of 2020.
We reported a net loss of $2.9 million in 2019.
Adjusted earnings for the second quarter of 2021 were $12.2 million compared to adjusted earnings of $3 million for the second quarter of 2020 and $820,000 in 2019.
Finally, earnings per diluted share were $0.41 for the quarter versus earnings per diluted share of $0.09 in the year ago quarter and a loss of $0.10 in 2019.
On an adjusted basis, second quarter earnings per diluted share of $0.41 compared to adjusted earnings of $0.10 for the second quarter of 2020 and adjusted earnings of $0.03 in 2019.
Turning to the balance sheet.
Inventory at the end of the second quarter was $224 million compared to $225 million at the end of March 2021 and $249 million at the end of June 2020.
The 10% year-over-year reduction in inventory was primarily driven by supply chain constraints on replenishment and strong sales that kept inventory below our targeted level.
Our balance sheet and liquidity are strong.
We ended the quarter with cash and cash equivalents of $112 million compared to $170 million as of December 2020.
During the second quarter, we repaid all $101 million of our outstanding credit facility debt consistent with the plans we shared on our last call.
Net cash provided by operating activities was $53 million for the six months ended June 30, 2021 primarily due to positive changes in working capital reflecting continued inventory supply constraints as well as $23 million of net income.
We continue to work toward rebuilding our inventory to optimal levels.
As we are able to do so, we would expect that to have an unfavorable impact on working capital and cash provided by operating activities.
As of June 30, 2021, we had $241 million of liquidity comprised of $112 million of cash and cash equivalents, and $129 million of excess availability under the credit agreement.
This represents an increase in liquidity of $55 million from June 30, 2020.
Turning now to the remainder of 2021, in the face of a dynamic operating environment.
our team remains dedicated to our transformation, driving growth and improving profitability.
I would like to expand on some of the details that Charles touched on at a high level.
We are pleased with the traction we are gaining on our transformation initiatives.
That said, given the combination of increasingly challenging supply chain constraints on inventory replenishment, potential consumer demand shift and the potential impact of the COVID-19 delta variant, we believe it is prudent to plan for slowing comparable sales on a two-year stack basis for the second half of 2021 compared to the 10% we delivered in the second quarter.
We remain concerned that higher transportation material costs will persist in the second half and we look to offset higher costs through pricing and promotion strategies while monitoring the market to inform and guide our decision.
As we saw in the second quarter, we expect installation sales to return to a pre-COVID mix in 2021 as we execute our initiatives to attract more customers and as our customers are more comfortable having people enter their home.
This will benefit gross margin dollars, but lower the gross margin rate.
With respect to SG&A, during the second half of 2021, we would expect adjusted SG&A spending to increase as a percent of sales compared to the second quarter.
This is due primarily to be increasing investments in our field organization that Charles discussed as well as continued investment in our strategic initiatives to support our growth over the long term.
We still expect CapEx investments of approximately $24 million to $28 million in 2021 primarily for the broad scale rebranding of our stores, the opening of 12 to 15 new stores, and investments in digital.
During the second quarter, we opened four new stores.
In April, we opened our Exton, Pennsylvania store.
In May, we opened a new store in Medford, New York.
And in June, we opened new stores in Hattiesburg, Mississippi and Beckley, West Virginia.
The new stores have the LL Flooring branding and we are excited about the opportunity to drive additional sales and profitability growth through these new location.
In summary, we delivered strong sales growth and profitability in the second quarter on both a one and two-year basis, demonstrating solid progress on our transformation initiatives.
Our entire organization remains focused on driving growth and profitability in 2021.
And our strong balance sheet and liquidity provide us with the financial flexibility to fund our strategic growth initiatives and position LL Flooring for long-term success.
With that, I'll ask the moderator to open the call for question.

user
compname says ll flooring posts q2 earnings per share $0.41.
q2 earnings per share $0.41.
q2 sales $301.4 million versus refinitiv ibes estimate of $296.8 million.
qtrly total comparable store sales increased 31.3% versus same period last year.
during q2, company opened four new stores, bringing total stores to 416 as of june 30, 2021.
not providing financial guidance at this time.
prudent to plan for slowing comparable sales on a 2-yrstack basis for h2 2021 versus 10% 2-year stack delivered in q2.

assistant