Lumber Liquidators (NYSE: LL), a leading specialty retailer of hard-surface flooring in North America, today announced financial results for the fourth quarter and full year ended December 31, 2019.

"During the quarter, we made continued progress implementing our transformational plan designed to reinvigorate our brand and position us to deliver exceptional value in the hard-surface flooring marketplace," said Interim President and Chief Customer Experience Officer Charles Tyson. "Comparable store sales grew slightly in the quarter, and profitability improved significantly, in large part due to the tariff exclusions announced by the U.S. Trade Representative in November."

"Reflecting on the full year, 2019 was especially dynamic with an ever-changing tariff environment," Tyson continued. "Our tariff mitigation efforts in 2019, coupled with the exclusions announced in November, allowed us to substantially improve gross margins while remaining focused on delivering value to customers. As we enter 2020, we remain focused on three key areas – delivering enhanced profitability, driving traffic to our stores and online, and improving the customer experience."

Fourth Quarter Results

Net sales for the fourth quarter of 2019 increased $4.9 million, or 1.8%, to $274 million as compared to the fourth quarter of 2018. Comparable store sales increased 0.4% as compared to the fourth quarter of 2018 driven by sales growth in the vinyl plank category offset, in part, by weakness in bamboo and laminate. The Company opened two new stores and closed two stores in the fourth quarter of 2019.

Gross profit increased 17% in the fourth quarter of 2019 to $112 million as compared to $96 million in the comparable period in 2018. Gross margin expanded to 40.9% in the fourth quarter of 2019 from 35.7% in the fourth quarter of 2018 primarily due to the retroactive exclusion of tariffs on certain flooring products imported from China discussed under "Tariff Recovery" below. The fourth quarter of 2019 was unfavorably impacted by countervailing duty rate changes and the fourth quarter of 2018 was favorably impacted by classification adjustments related to the Harmonized Tariff Schedule ("HTS"). Excluding these items as shown on the table that follows, Adjusted Gross Profit (a non-GAAP measure) increased by $18 million and Adjusted Gross Margin (a non-GAAP measure) improved to 41% this quarter from 35.1% in the fourth quarter of 2018. As noted, the margin increase was primarily driven by the retroactive tariff exclusions. The period was also favorably impacted by a larger mix of higher-margin manufactured products, reduced discounting in the stores, merchandising cost-out efforts, and selective retail price increases earlier in 2019. See "Non-GAAP and Other Information" below for a discussion of our use of non-GAAP items and a reconciliation of non-GAAP results.

Selling, general and administrative ("SG&A") expenses decreased 39% in the fourth quarter of 2019 to $93 million from $151 million in the comparable period in 2018. SG&A in both quarters included incremental legal as well as other costs and credits related to lawsuits, investigations and certain other legal matters, with the most substantial being $61 million in accruals related to legal settlements recorded in the fourth quarter of 2018. Adjusted SG&A (a non-GAAP measure) increased $5.4 million to 33.9% as a percentage of sales, 130 basis points higher compared to the fourth quarter of 2018, primarily due to higher advertising, additional costs related to six net new stores compared to the fourth quarter a year ago, higher year-over-year incentive compensation and equity accruals, and costs related to the corporate headquarters relocation that occurred in fourth quarter of 2019.

Operating income was $19 million for the fourth quarter of 2019 compared to an operating loss of $55 million for the fourth quarter of 2018. Adjusted Operating Income (a non-GAAP measure) was $19 million for the fourth quarter of 2019 compared to $6.7 million for the fourth quarter of 2018. The most significant driver of the increase was the impact on Adjusted Gross Margin from the retroactive exclusion of tariff on certain flooring products as well as additional efforts to enhance gross profit, partially offset by an increase in Adjusted SG&A.

Income tax expense was $2.4 million for the fourth quarter of 2019 compared to income tax expense of $0.4 million for the fourth quarter of 2018. The increase was driven by higher taxable income leading to the complete depletion of the Company's Federal net operating losses.

Net income for the fourth quarter of 2019 was $16 million, or $0.57 per diluted share, compared to a net loss of $57 million, or $1.99 per diluted share, for the fourth quarter of 2018. Adjusted Earnings and Adjusted EPS (non-GAAP measures) for the fourth quarter of 2019 were $16 million and $0.56 per diluted share, compared to $4.7 million and $0.17 per diluted share, for the fourth quarter of 2018.

As of December 31, 2019, the Company had $57 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan, which, collectively, is a $7.5 million decrease from the end of the third quarter 2019. As of December 31, 2019, the Company had $111 million in liquidity, comprised of $9 million of cash and cash equivalents and $102 million of availability under the Credit Agreement.

Full-year Results

Net sales increased $8 million, or 0.7%, to $1,093 million in 2019 from $1,085 million in 2018, which includes a $19 million increase in non-comparable store net sales partially offset by a decrease of $11 million, or 1.0%, in comparable store net sales. Net services sales (install and freight) increased 6.1% over the prior year while net merchandise sales remained flat. The Company opened 11 new stores in 2019, closed 5, and as of December 31, 2019, operated 419 stores in the United States and Canada.

Gross margin in 2019 increased to 36.9% from 36.2% in 2018, and when excluding items in the table that follows, Adjusted Gross Margin (a non-GAAP measure) increased to 37% in 2019 from 35.6% in 2018. This 140 basis point improvement was due to a larger mix of higher-margin manufactured products, reduced discounting in the stores, merchandising cost-out efforts, and selective retail price increases. The improvement in Adjusted Gross Margin was achieved despite higher tariff-related costs and an increased mix of lower-margin installation sales.

SG&A expenses decreased as a percentage of net sales to 35.4% in 2019, compared to 40.9% in 2018. When excluding items in the table that follows, Adjusted SG&A as a percentage of net sales (a non-GAAP measure) was 34.7% in 2019, an increase of 100 basis points from 33.7% in 2018. The increase in Adjusted SG&A was driven by a combination of higher payroll and occupancy costs, which are primarily related to the 11 new stores opened this year, increases in IT expense, costs related to the headquarters move, and higher advertising.

Operating income was $17 million in 2019, compared to an operating loss of $51 million in 2018, heavily influenced by certain legal settlements. When excluding items in the table that follows, Adjusted Operating Income (a non-GAAP measure) was $25 million, with Adjusted Operating Margin of 2.3%, in 2019, compared to $20 million, or 1.9%, in 2018. The primary driver of the increase was the growth in gross margin due to tariff mitigation efforts.

Income tax expense was $3.3 million in 2019 compared to income tax expense of $1 million in 2018.

Net income was $9.7 million, or $ 0.34 per diluted share, in 2019 compared to a net loss of $54 million, or $1.90 per diluted share, in 2018. 2019 benefited from actions taken to improve gross margin while 2018 was adversely affected by legal settlements and other legal costs.

Tariff Recovery

On November 7, 2019 the United States Trade Representative ruled on a request made by certain interested parties, including the Company, and retroactively excluded certain flooring products imported from China from the Section 301 tariffs implemented at 10% beginning in September 2018 and escalating to 25% in June 2019. The granted exclusion applies retroactively from the date the tariffs were originally implemented on September 24, 2018 through August 7, 2020. The Company recognized approximately $11 million of operating income in the fourth quarter of 2019 related to recoveries associated with relevant products already sold through November 2019, net of certain other associated costs. The Company also reduced the carrying cost of inventory by approximately $12 million related to relevant products held for sale and recorded a receivable of $25 million from U.S. Customs related to anticipated recoveries and expects to receive payments throughout the first half of 2020.

Commentary Regarding the Coronavirus

The Company obtains nearly half of its merchandise from Asia and most of that is sourced from China. As such, the Company is closely monitoring the Coronavirus situation including the actions taken by authorities to combat the spread of the virus, which includes extended quarantines and restrictions on travel of both people and goods. The near-term risk is the potential disruption to the Company's supply chain. The Company is currently unable to predict the full impact of these potential disruptions, how and in what manner competitors will be affected, or the reaction of customers. Merchandise on hand and already in route should allow the Company to avoid a material impact in the first quarter of 2020. However, depending on the length and severity of the situation, the Company could see a material impact beginning as early as the second quarter, and such impact could continue for weeks or months. The Company is monitoring on a daily basis and evaluating what actions to take to respond to potential disruptions.

2020 Outlook

The Company introduced 2020 full-year expectations which exclude any potential supply chain disruption and associated financial impact related to Coronavirus as the Company is currently unable to estimate the magnitude of such impact. In addition, Company expectations assume the continuation of Section 301 tariffs at 25% on currently tariffed Chinese imports while also assuming tariff exclusions granted in 2019 on vinyl and engineered "click" product remain in effect for all of 2020 despite a currently proposed August 2020 expiration. The Company's 2020 Outlook is as follows: