bill oxford
LL Flooring (NYSE:LL) continues to struggle to grow sales in an environment where discretionary income is being pinched by inflation and what is left is directed more towards entertainment and travel. It is less confident in its ability to deliver positive comparable store sales for the full year now.
As well, material and transportation cost inflation is resulting in its adjusted operating margins remaining relatively low at 2.0%.
While I’ve been skeptical about LL Flooring’s ability to reach its target of $1.5 billion in revenues by 2024, it appears that it may end up falling short of that target by more than I previously expected. I have trimmed my expectations for 2022 revenues by a couple percent, while LL Flooring’s decision to slightly reduce the number of stores it opens in 2022 will also have a bit of impact on future revenue growth.
LL Flooring may largely trade sideways in the current consumer environment, but it still should be able to generate a bit of positive cash flow and can use that cash flow to repurchase shares. LL Flooring is valued at around 1.0x book value currently and may have upside to the high-teens if the consumer environment improves and its margin headwinds ease up.
Q2 2022 Results
LL Flooring’s Q2 2022 results missed expectations, although they weren’t all that bad. LL Flooring reported -3.1% comparable store sales, a slight sequential improvement from Q1 2022 and +6.9% on a three-year stack basis.
It also reported a 2.0% adjusted operating margin, slightly up from 1.7% in Q1 2022. This came despite major inflationary pressures. LL Flooring noted that its material and transportation costs added over 10% in gross margin headwinds that it was mostly able to offset through adjusting pricing and promotions as well as implementing alternative vendor sourcing strategies.
Revision To H2 2022 Outlook
While the Q2 2022 results were generally okay, LL Flooring’s outlook for 2H 2022 has deteriorated. It previously expected positive comparable stores sales growth for the full-year, and now believes that it may not be able to deliver positive full-year comps.
As well, transportation and material costs are expected to continue to be headwinds throughout 2022. This isn’t a surprise given the inflationary environment though.
Due to these near-term challenges, LL Flooring has trimmed its capital expenditure budget by around $6 million, while reducing the number of new stores it expects to open in 2022 from a range of 20 to 25 down to the new range of 20 to 22 new stores.
There is some uncertainty about what LL Flooring’s 2H 2022 performance will look like since it isn’t providing formal guidance on margins or comparable store sales growth for that period itself.
Notes On Revenue Growth
LL Flooring is probably more on track to reach around $1.16 billion to $1.17 billion in revenues in 2022 now (down from expectations for nearly $1.2 billion before). This makes it quite unlikely to achieve previously stated goal of getting to $1.5 billion in revenues by 2024. LL Flooring would need to average 13% to 14% revenue growth in 2023 and 2024 to reach that target now.
I previously thought that around $1.4 billion in revenue could be attainable for 2024 with a combination of new store openings and a noticeably improved consumer environment. Now $1.3 billion to $1.35 billion in revenue for 2024 might be a better expectation if the consumer environment noticeably improves, and that is a significant question mark of course.
Cash Flow And Valuation
While the current environment isn’t great for LL Flooring, it still looks capable of generating some (such as $15 million to $20 million per year) positive cash flow at current sales and operating margin levels. This can go to fund its share repurchase program, which currently is authorized for $43 million in remaining purchases. That amount allow it to repurchase approximately 16% of its outstanding shares based on its current share price.
At $9 to $10, LL Flooring is probably fairly priced for the current consumer (plus material and transportation cost) environment. However as noted above, it can bide its time in the current environment by generating a bit of positive cash flow while also repurchasing shares. At $9.37 per share it is essentially valued at 1.0x book value.
In an environment with stronger consumer demand and easing of the inflationary pressures, LL Flooring should be able to generate $30+ million per year in positive cash flow and I’d estimate its value in the high-teens.
Conclusion
LL Flooring’s near-term outlook is pretty mediocre. It had slightly negative comparable store sales in 1H 2022 and is no longer confident in its ability to reach positive full-year comps for 2022. LL Flooring’s 2024 revenue target of $1.5 billion also appears out of reach.
LL Flooring is also dealing with strong margin headwinds due to transportation and materials costs. Despite this, it still looks capable of generating a bit of positive cash flow and can use that cash flow to reduce its share count.
LL Flooring is treading water for now, but has an estimated value in the high-teens in a stronger consumer environment where its margin headwinds have eased up.
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