TOANO, Va. - Lumber Liquidators (NYSE: LL) hardwood flooring sales dropped precipitously at a time when other flooring firms are booming with the home building and remodeling industry.
Net sales in the first quarter of 2016 were $233.5 million, a decrease of 10.2% from the first quarter of 2015, including a comparable store net sales decline of 13.9% due to a 13.8% decrease in the number of customers invoiced and a 0.1% decrease in the average sale. Comparable store net sales trends improved within the quarter due in part to more favorable comparisons in the latter part of the prior period.
Net loss was $32.4 million.
The Company believes net sales were impacted by changes in our promotional strategy and continued negative consumer sentiment regarding us, which was in part a result of heightened negative media coverage during the first quarter associated with certain Chinese laminate product that the Company discontinued in May of last year.
John Presley, CEO, opened a press conference yesterday stating the fall-off doesn't reflecet the future direction of the wood flooring company.
In March of this year, we were impacted by continued negative customer sentiment driven partially by new round of negative publicity related to legacy regulatory issues, many of which were coming to a close during the first quarter. We are hopeful as we continue to resolve our remaining legal issues that adverse media attention will subside. Importantly, we do not believe our financial performance in the first quarter reflects the progress we have made in repositioning Lumber Liquidators for success.
Since I became CEO in November, one of my main areas of focus has been to move our company beyond these legacy issues so that we can give our full attention to strengthening the core business and our competitive position in the market. I'm pleased to report that year-to-date we have successfully overcome several of the regulatory hurdles that challenged our company over the past year. While we still have some ground to cover, let me briefly walk you through the progress we have made on this front. In March of this year, we reached a settlement with the California Air Resources Board, CARB, resolving from their inquiry with no formal finding of violation. CARB's inquiry was focused on a Chinese laminate product, which we have not carried in our stores for over a year. (transcription courtesy Seeking Alpha)
Gross margin was 32.6% in the first quarter of 2016, compared with 35.2% in the prior year period. This decrease is primarily attributable to a lower average selling price versus the prior year period.
Selling, general and administrative ("SG&A") expenses in the first quarter of 2016 were $117.2 million, an increase of $19.6 million over the prior year quarter. This increase is primarily attributable to a net charge of approximately $16.0 million related to our consolidated securities class action, as well as a net increase in incremental legal and professional fees and accruals of $13.5 million associated with the Company's defense of outstanding legal and regulatory matters. As a percentage of net sales, SG&A increased to 50.2% from 37.5% during the prior year period.
The effective tax rate was 21.5% in the first quarter of 2016, which is attributable to the establishment of a valuation allowance against a portion of the Company's deferred tax assets and a limitation on the amount of tax benefit recognized.
During the quarter, the Company made measurable progress in its efforts to resolve outstanding legal and regulatory issues: On April 27, 2016, the Company entered into a memorandum of understanding with the lead plaintiffs in the consolidated securities class action matter to settle outstanding claims. Under the terms of the MOU, which is subject to certain contingencies and court approval of a final settlement agreement, the Company, through its insurers, will contribute $26 million as well as 1 million shares of the Company's common stock to a settlement fund to resolve the matter. Additionally, as previously disclosed, the Company reached a settlement with the California Air Resources Board, and received a favorable ruling in its Proposition 65 lawsuit.
Presley noted, "During the first quarter of 2016, we continued to take steps in the right direction for Lumber Liquidators. Our sales results fell short of our expectations, but we continue to see improvement in our gross margin from the lows of 2015 driven by our strategic pricing initiatives. With the addition of Dennis Knowles to our executive team, we have a dedicated professional leading the customer experience in our stores and are focused on driving top-line improvement. We also made progress on several legal and regulatory issues, and while there is still work to do, we believe we have the right team in place to address these challenges. We continued to execute on our plan to strengthen our business, including enhancing compliance and sourcing, as well as improving training for our store associates. Our management team is confident in the potential of our business, and we believe that by continuing to work our plan, we will return Lumber Liquidators to growth and profitability.
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