Lumber Liquidators Holdings, Inc. (LL) Q4 2020 Earnings Call Transcript

Lumber Liquidators Holdings, Inc. (NYSE: LL) Q4 2020 earnings call dated Mar. 02, 2021

Corporate Participants:

Julie MacMedan — Head of Investor Relations

Charles E. Tyson — President and Chief Executive Officer

Nancy Walsh — Chief Financial Officer

Analysts:

Laura Champine — Loop Capital Markets — Analyst

Brian Nagel — Oppenheimer & Co. — Analyst

Seth Basham — Wedbush Securities — Analyst

Peter Keith — Piper Sandler — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to the Lumber Liquidators Fourth Quarter and Full-Year 2020 Earnings Conference Call. As a reminder, this conference is being recorded and may not be reproduced in full or in part without permission from the Company.

I would now like to turn the conference over to Julie MacMedan. Please go ahead.

Julie MacMedan — Head of Investor Relations

Thank you, operator. Good morning, everyone, and thank you for joining us. Today, I am joined by Charles Tyson, our President and Chief Executive Officer; and Nancy Walsh, our Chief Financial Officer.

As we begin, let me reference the safe harbor provisions of the US securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in Lumber Liquidators’ filings with the SEC.

During today’s conference call, management will be discussing results on an adjusted basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in today’s earnings release.

The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative after today, and Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now, I am pleased to introduce President and CEO, Charles Tyson. Charles?

Charles E. Tyson — President and Chief Executive Officer

Thank you, Julie. A year ago I shared with you my excitement about the opportunities ahead for us to leverage our solid foundation as a high-touch specialty flooring Company, execute our transformation plan and deliver shareholder value. As I look back on 2020, I’m both proud of all that our team has accomplished and energized by how much opportunity still lies ahead. 2020 was a dynamic and challenging year. Customers demanded a safe omni-channel shopping experience and our teams rose to the occasion. I want to thank our entire team for their commitment, flexibility, and perseverance throughout the entire year to deliver both strong financial results and outstanding service to our customers. I’m very proud to be leading such a dedicated team, who are working every day to execute our transformation strategy and elevate the experience for all customers, whether they are DIY, do-it-for-me or our Pros. I also want to thank our vendors, landlords, and suppliers for helping us navigate through the COVID-19 environment to service our customers.

Turning to our positive results for the quarter. We demonstrated solid progress on our transformation plan, which positioned us to take advantage of a robust home improvement spending environment. In the fourth quarter, [Technical Issues] increase in comp sales. We also achieved an impressive operating income of $18 million when compared to $19 million in the fourth quarter of 2019, given that the prior year fourth quarter included a one-time $11 million benefit from the retroactive exclusion of Section 301 Tariffs. This underscores the underlying operating profit improvement we achieved in 2020 versus 2019.

For the full-year, we delivered $1.1 billion in net sales, flat to 2019, demonstrating resilience as we navigated the COVID-19 shutdown in the spring to grow comp sales 10.8% in the second half of 2020. We also achieved significantly higher profitability due to progress on our profit initiatives with adjusted operating income of $64 million, up from $25 million in 2019, and an adjusted operating margin of 5.8%, up 350 basis points versus 2019. These strong fourth quarter and full-year financial results reflect our continued execution against our strategic pillars of people and culture, improving the customer experience, driving traffic and transactions in our stores and online and improving profitability.

Our first strategic pillar, people and culture, is a critical driving force behind our transformation strategy. During the fourth quarter, we formalized our Company’s vision, purpose and values, making a critical step in developing our culture and executing our strategy to serve our customers at the highest level. Our vision is to be the customers’ first choice in hard-surface flooring by providing the best experience from start to finish. Focusing on our associates, we’re deploying robust training programs that help them achieve decision by better serving our customers. We are making progress on ensuring that we have the right leaders in the right roles to effectively achieve our Company’s goals. During the fourth quarter, we added more regional and store managers in training to build our bench for future store leadership.

Our second pillar is improving the customer experience. First, I want to reiterate our brand promise to our customers. We offer a wide selection of high-quality, stocked products and the accessible flooring expertise and service of a local store, with the scale, omni-channel convenience and value of a national chain. We plan to leverage this advantage to differentiate ourselves in the highly fragmented flooring market. During the fourth quarter, we made good progress towards elevating the customer experience. I’m pleased to announce the launch of our new digital platform in December of 2020. If you’ve not visited the new LLFlooring.com site, I encourage you to take a look. The mobile-friendly site features inspirational content that better tells our story, clearly showcases our flooring in digital room scenes, highlights our digital tools like Picture It!, and Floor Finder, and promotes our services such as installation, free flooring samples and delivery.

Installation is an important service that we provide. Fourth quarter installation sales were up versus the same period in 2019 and sequentially from the third quarter, reflecting progress on our initiatives and a willingness by customers to have installers in their homes. New installation assessment trends indicate demand for installation services remain strong. However, we will monitor the COVID-19 environment and customers’ continued willingness to have installers in their homes. During the fourth quarter, we began testing a new in-store portal for installation that will increase efficiency for our store associates and reduce turnaround time for our customers when quoting new jobs.

Our sales to Pros were flat in the fourth quarter versus a year ago. Building our Pro business is a core element of our transformation strategy. We remain focused on transitioning from a transactional sales approach to building longer-term relationships and credibility with Pros, which will take some time. We expect to drive growth during this evolution and we are investing in tools and sales strategies, including our new trial, scale and retention program, which provides a roadmap to our store associates as they build trusted partnerships with this important customer segment. Our teams are also working hard to learn more about what our Pros want and where we are leveraging enhanced reporting to better understand Pro behaviors at the local store level. Finally, we are watching the impact of COVID-19 on customers letting Pros into their homes.

Turning to our third strategic pillar of driving traffic and transaction in both stores and online. For the fourth quarter, our web sales increased more than 90% versus 2019. We are pleased with the new customer growth. Our investment in digital marketing is delivering. And we’re encouraged to see so many customers want to engage online for large ticket purchases. We’re extremely excited about our new digital platform that launched at the end of fourth quarter. This new platform builds on the great work our teams have done over the past two years and further advances our omni-channel strategy. We are particularly pleased with how the enhanced mobile experience is engaging our customers.

Our product assortment is a key competitive advantage and traffic driver. During the fourth quarter, we emphasized driving new design and innovation in our most popular vinyl and wood categories, such as our Bellawood brand. Vinyl benefited from an expanded assortment and we see room to expand it further in 2021.

As a high-touch, high-surface flooring retailer, we also emphasized selling a complete solution to our customers, adding the necessary higher-margin attachments, such as moldings and other accessories. We were pleased with the comp growth and accessory sales in the fourth quarter versus 2019. This growth was significantly driven by our training programs for sales associates and increased awareness through LLFlooring.com. We continue to evolve our brand and both the new digital platform and the physical stores are critical components of this. We are pleased with the performance of our brand revitalization pilot of 20 plus stores. Based on early feedback, customers who experienced the LL Flooring brand viewed it as more approachable, relevant and of higher-quality. We are looking forward to the broader rollout of the brand revitalization for our stores this spring as part of our long-term brand evolution.

And fourth, improving profitability. In the fourth quarter, execution of our gross margin improvement strategies was meaningful. Our merchant and sourcing teams continued their work on improving pricing and promotional strategies, introducing new products and driving our alternative country-sourcing strategies to improve gross margins. We ended 2020 with 34% of our goods purchased from China, down from 46% for the full-year of 2019. The pace of our sourcing diversification is impressive given the substantial vetting process we undertake to ensure our rigorous quality standards are met.

Our fourth quarter adjusted gross profit was $116 million, up from $112 million in 2019, and adjusted gross margin was 38%, compared to 41% in the fourth quarter of 2019. It’s hard to see the full impact of our good work on gross margin because we’re comparing against the $13 million one-time benefit in the fourth quarter of 2019 from the retroactive exclusion of Section 301 Tariffs. When excluding that item, our adjusted gross margin increased 200 basis points from the fourth quarter of 2019. We remain focused on executing our transformation plan and making progress against our strategic pillars to position us for long-term success.

I want to briefly update you on recent developments under each of our four pillars. First, let’s start with people and culture. Our diversity, equity and inclusion task force, comprised of a cross-functional team of associates, has created a working charter and is in the process of identifying programs targeting the Company’s ability to attract, develop, promote, and retain an inclusive workforce. Our commitment to training to build a high-performance organization remains in 2021.

After establishing our vision, purpose and values in the fourth quarter, we began to socialize and reinforce them with our leadership. We’ve developed a robust program to communicate our messaging around our core values and commitments throughout the organization. I’m really excited about what we can achieve as one team aligned around a singular vision.

Moving to improving the customer experience. In 2021, delivering a seamless omni-channel experience remains a top priority. With our new digital platform, we are better able to reach our customers with new relevant content, such as how-to-videos and the LL style home design content, showcasing the latest trends. We will also make sure we have the right people in the right roles, and the staffing to serve our customers, however they want to be served, and we will empower our sales associates to leverage our online tools and capabilities in the store.

In the fourth quarter of 2020, we began to rollout new tablets and enhanced Wi-Fi capabilities, with that deployment largely completed by the end of January. Sales associates can now better conduct both in-person and virtual consultations to guide customers, partner with Pros and drive install efficiency. In addition, the tablets further enhance our ability to deliver training across our organization.

We also upgraded the technology in our customer relationship center to more efficient, lower cost support model for our associates to engage our customers. This technology is key to driving the seamless customer experience across all channels of engagement with our brand. We have rolled out the new installation portal to all stores and we’ll be enhancing its capabilities in future quarters.

Turning to our Pro customers. We see an opportunity to win with the Pros who want a wider choice, a trend-right assortment and a high-level of service and expertise that allows them to delight their customers. Building our relationships with Pros is a key focus. We recently launched a pilot program in a number of major markets with outside Pro account reps to better serve these potential high-growth accounts. In 2021, we will develop and launch programs that make it easier and more compelling for Pros to do business with us, and we look forward to updating you on future capabilities in upcoming quarters.

I’d like to share an example of how our stores are elevating their relationship with the Pros. A new Pro Account Rep, Laura Davidson [Phonetic], reconnected with a Pro customer in Denver, who had not shopped with us since 2018 and discussed the value with LL Flooring. The Pro had an immediate opportunity for us. He was looking for a 5 inch hickory hardwood for a current project. Our Denver Store Manager, Sean Cushing [Phonetic], provided options to Laura and the Pro picked his top two. Laura and Sean then opened the store early to cater the Pros tight schedule.

During the store meeting, they expanded the discussion beyond hardwood to encompass other flooring and accessory options. In less than a week, Laura and the Denver team secured a hickory hardwood order, a luxury vinyl plank order and custom-ordered matching stair treads. Communication with the store, customer and Laura has been great. And the Pro is building trust that LL is the place he should do his business. He told the store team and Laura that he had another large shop coming up very soon. Laura, Sean and the Denver store team all stepped up to take care of the Pro and they have positive that he will be an active customer in 2021. This story highlights the opportunity we have to build stronger relationships with Pro customers to sell a complete solution and to build repeat business. Great work, Laura, Sean and team. Thank you.

Turning to our objective of driving traffic and [Technical Issues] omni-channel capabilities with new tools to help drive traffic and transactions with customers. Our customers have responded extremely well to our Picture It!, and Floor Finder tools and we’ve just begun to take advantage of the power of our new digital platform that gives us more agility and speed to better showcase our flooring and services and drive traffic to our stores.

We’ll continue to invest in our vinyl and hardwood assortment and drive innovation areas, such as water-resistant flooring. With our new website we can rapidly update new offerings and leverage our omni-channel strength to expand our assortment online with exclusive SKUs and then look to introduce the most popular SKUs into our stores. We will also promote attachment selling of items, such as molding, stairs and grills.

We’ll build on our digital marketing success in 2020. We’ll continue to prioritize digital marketing, expanding our efforts on search and social, where our customers begin their inspiration journey. In 2021, we will also focus our targeted television advertising, such as HGTV. These efforts will attract new audiences and drive high-quality, intent-driven traffic to LLFlooring.com, that we can convert into transactions.

As it relates to the rebranding of our stores, based on early feedback from customers, we believe the store rebranding will help make our stores more attractive and approachable and we’re excited about leveraging our physical store footprint to further reinforce our value proposition. We’re planning a broad scale rebranding of our stores in 2021 and we look forward to updating you on future calls regarding our progress.

Finally, we continue to work on improving profitability. We are investing in and building momentum around our internal growth initiatives as we execute our transformation strategies. Given the uncertainty due to COVID-19, we are not providing financial guidance in 2021 at this time. We would, however, like to share some color around our outlook and approach for the year. The second half of 2020 was a period of substantial expansion in the home improvement sector, and we believe several trends that boosted consumer spending in our category in 2020 will persist early in 2021. Residential investment, existing home sales and rising home prices spurred by low interest rates should continue to provide tailwinds.

That said, there remains a significant number of unknowns this year, such as risk from renewed shutdowns due to COVID-19 and consumer spending preferences once and if people become more mobile later this year as the vaccine rolls out. We are watching how install and Pro sales are impacted by customers’ willingness to have contractors enter their home, balancing the nesting behaviors that is a positive for DIY customers. Visibility later in the year is more limited at this time. But we anticipate the customers may begin to shift some spending away from home improvement, a more towards travel, leisure services and apparel once it becomes safer to leave their home. And we will face tougher comparisons in the third and fourth quarter of 2021.

We also remain focused on the current volatility of international supply chain and domestic hardwood supply with the potential for further disruptions. We believe we could have captured more sales in the fourth quarter if our inventories have been higher. That said, our field teams did great work offering customers alternative products and managing inventory flow from our DCs to stores to fulfill orders. Based on what we know today and barring any further supply chain disruptions, we expect our on-hand inventories to be similar from now through the end of the first half of 2021 and to increase to more optimal levels of between $270 million and $290 million in the second half.

In the midst of all these crosscurrents in the operating environment, we have focused on executing our transformation initiatives. For example, our LLFlooring.com digital platform is still new, but we are pleased with the new customer growth we’re generating. Our teams are better equipped to improve the customer experience through new technologies and services and we’re building momentum in creating our new high-performance culture. Our teams are energized around being the customers’ first choice in hard-surface flooring, remaining agile and optimizing our opportunity in an uncertain operating environment.

Turning to gross margin. We’ve done a lot of good work over the past two years to improve our margin. In 2021, we expect tariffs, transportation and raw material costs to be headwinds. In order to offset these headwinds, we will continue to execute our mitigation strategies of reducing our costs through alternative country-sourcing, partnering with vendors to introduce new products and through enhanced pricing and promotion strategies.

First, tariffs. We will be unfavorably impacted by the reinstatement of 25% Section 301 Tariffs that went into effect on August 2020. Leveraging best country-sourcing for our entire suite of products across all of our operations remains key to our cost mitigation strategy. Imports from China at the end of 2020 was 34% down from 46% for the full-year 2019. We are continuing to review the opportunity for best country-sourcing that meets our stringent quality standards.

I also want to point out that the global supply chain remains constrained due to the strong demand for inventory during the post COVID-19 recovery, and tight domestic hardwood supply as our suppliers have been impacted by COVID-19. This could unfavorably impact our gross margins in 2021 from both higher transportation and raw material input costs.

We are monitoring transportation costs, both international and domestic, as our contracts come up for renewal this year. We will look to offset higher-sourcing costs through pricing and promotional strategies, while monitoring the market to inform and guide our decisions.

With respect to SG&A in 2021, we will maintain disciplined expense management. We are really pleased with the effectiveness and efficiency we are achieving on lower marketing spend given our focus on digital and we feel good about the current level of marketing spend as a percent of sales. We plan to leverage the base SG&A expense year-over-year and reinvest expense savings in our growth initiatives, including new technology to improve the customer experience, investment in our teams, the opening of new stores and investing in our Pro business with our Pro Account Rep program. These strategic initiatives are expected to deliver appropriate returns for the Company based on our internal hurdle rates.

In summary, we’re excited about the progress we’ve made on our transformation initiatives and the strong profitability improvements we delivered in 2020. Our team is highly engaged and focused on elevating the customer experience and making LL Flooring the customers’ first choice in meeting their hard flooring needs.

We’ve defined our vision, values, and how we’re going to win with our customers, and we’ve got a robust execution plan in place for 2021. We’ve also proven our ability to navigate an uncertain macro environment, and we will remain agile and disciplined as we execute our plan. We look forward to reporting on our progress each quarter.

I’ll now turn the call over to Nancy to share the financial details of the quarter. Nancy?

Nancy Walsh — Chief Financial Officer

Thanks, Charles, and good morning, everyone. Please note that during my remarks, I will be discussing results on an adjusted basis. Please refer to today’s press release for a reconciliation to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful.

In the fourth quarter, net sales of $304.2 million, increased $30.4 million, or 11.1%, versus 2019 due to an 11.2% increase in merchandise sales, and a 10.2% increase in service sales. Comparable store sales increased 10.5% versus a year ago, primarily as a result of execution on our transformation and healthy consumer demand for home improvement projects. We saw a 1.6% increase in our average ticket due to higher installation sales and an 8.9% increase in transaction count, compared to the same period in 2019.

Gross profit increased 5% in the fourth quarter of 2020 to $118 million from $112 million in the comparable period in 2019 on higher sales. Gross margin of 38.8% in the fourth quarter of 2020, compared to 40.9% in the fourth quarter of 2019. During the fourth quarter of 2020, gross margin included a net $2.2 million benefit from countervailing and anti-dumping expense associated with the applicable prior year shipments of engineered hardwood from China, compared to a net $400,000 expense in the fourth quarter of 2019. When excluding these items from both periods, adjusted gross profit for the quarter was $116 million, compared to $112 million in the prior year, and adjusted gross margin was 38.1%, compared to 41% in the prior year. Excluding the one-time benefit in 2019 from the retroactive exclusion of Section 301 Tariffs, gross margin increased 200 basis points versus the fourth quarter of 2019. This significant gross margin improvement primarily reflects merchandising, sourcing and cost-out efforts, and to a lesser extent, selective retail price increases.

As a reminder, our financial statements have been impacted by Section 301 Tariffs on certain products imported from China in recent years. In November 2019, a subset of these imports for certain click vinyl and other engineered products received an exemption that was made retroactive to the inception of the Section 301 Tariffs in September 2018. On August 7, 2020, this exemption expired. The August reinstatement of Section 301 Tariffs on certain products imported from China began to flow through the income statement in the fourth quarter of 2020 as the product was sold.

Cash flow in the fourth quarter was also reduced as the Company began to pay tariffs on the product affected by the Section 301 Tariff reinstatement.

SG&A expense for the fourth quarter was $99.6 million, or 32.7% of sales, leveraging 110 basis points, compared to $92.6 million, or 33.8% of sales in the fourth quarter of 2019. SG&A in both quarters included certain costs related to legal matters.

Additionally, the fourth quarter of 2020 included $1.2 million of costs related to Canadian and US store closures, bringing the total to $3.8 million on the year. As anticipated, all 14 stores were closed by year-end, although certain cleanup activities will be completed in early 2021. When excluding these items from both periods, adjusted SG&A expense for the quarter was $97 million, $4 million higher versus $93 million in the fourth quarter of 2019, due primarily to higher bonuses and commissions on strong financial performance. As a percent of sales, SG&A leveraged 200 basis points to 31.9% of sales from 33.9% of sales in the fourth quarter of 2019.

For the quarter, we delivered operating income of $18.4 million, compared to $19.3 million in the fourth quarter of 2019. Adjusted operating income in the fourth quarter of 2020 was $18.8 million. This compared to adjusted operating income of $19.4 million for the prior year period when we reported an $11 million one-time benefit due to the retroactive exclusion of tariffs. Excluding that non-recurring event in 2019, the significant year-over-year improvement was primarily driven by higher net sales, merchandised-sourcing and cost-out efforts, and selective retail price increases, and SG&A leverage in 2020.

In the fourth quarter of 2020, we had other income of $68,000 compared to other expense of $0.5 million for the three months ended December 31, 2019. Both years reflected interest on borrowings on our credit agreement. The interest expense on borrowings in 2020 was offset by a favorable adjustment of $1.2 million for the reversal of interest expense associated with anti-dumping and countervailing duty rate changes.

In the fourth quarter, after determining that the Company was no longer in a consolidated three-year cumulative loss position, we partially released the valuation allowance recorded against most of our US deferred tax assets. As a result, we recognized an income tax benefit in the fourth quarter of $12.6 million. This was driven by the partial release of the valuation allowance of $19.6 million and year-end deferred tax true-ups, including the impact of the CARES Act. The release of the valuation allowance in Q4 has no impact on future cash taxes or effective tax rate.

For the fourth quarter of 2020, net income increased by $14.7 million to $31.1 million, compared to net income of $16.4 million for the fourth quarter of 2019.

Finally, earnings per diluted share was $1.05 for the quarter versus earnings per diluted share of $0.57 in the year ago quarter. On an adjusted basis, fourth quarter earnings per diluted share of $1.06, compared to $0.57 for the fourth quarter of 2019.

Recapping the full-year results. Total net sales increased $5 million to $1.1 billion in 2020. This represented a strong second half performance following the COVID-19 disruption in our second quarter.

Operating income increased $40 million to $56 million and adjusted operating income was up $39 million to $64 million. 2020 adjusted operating margin was 5.8%, up 350 basis points from 2.3% in 2019. The higher operating income reflects good progress on our profit improvement initiatives with our merchant and sourcing teams implementing strategies to improve gross margins. Our marketing team is deploying more efficient and effective digital marketing spend and our overall organization driving disciplined expense management.

We had other expense of $2.6 million and $3.8 million for the years ended December 31, 2020 and 2019, respectively. The expense in both years primarily reflected interest on borrowings under our credit agreement. The expense related to borrowings in 2020 was partially offset by a favorable adjustment of $1.2 million reported in the fourth quarter of 2020 for the reversal of interest expense associated with anti-dumping and countervailing duty rate changes.

For 2020, we reported an income tax benefit of $7.8 million, which represented an effective tax rate of negative 14.5%. Excluding the release of the valuation reserve and the CARES Act impact, income tax expense for 2020 would have been $13.6 million, which represented an effective tax rate of 25.3%. For the prior year, we recognized income tax expense of $3.3 million, which is an effective tax rate of 25.4%.

Net income was $61.4 million, or $2.10 per diluted share, in 2020 compared to net income of $9.7 million, or $0.34 per diluted share, in 2019. On an adjusted basis, 2020 earnings per diluted share of $2.28, compared to $0.54 for 2019. Net income and diluted earnings per share for the fourth quarter and full-year 2020 benefited from the partial release of the valuation reserve of $19.6 million.

Turning to the balance sheet. Inventory at the end of the fourth quarter was $244 million, up from $237 million at the end of September and compared to $286 million at the end of 2019. The 15% year-over-year reduction in inventory was primarily driven by managing our inventory purchases as a direct result of COVID-19, followed by supply chain constraints on replenishment and strong second half sales that kept inventory below our targeted level for year end. Our teams are working diligently to receive new inventory in the face of supply chain disruption. As of January 31, inventory was $243 million and we are working to increase inventory to a more optimal range of $270 million to $290 million in 2021.

Our balance sheet is strong. We ended the quarter with cash and cash equivalents of $170 million, up from $9 million at the end of 2019. Net cash provided by operating activities was $157 million for 2020, compared to $300,000 in 2019. The increase was driven by strong operating performance, along with our disciplined working capital management programs and temporary adjustments as we navigated the COVID-19 environment. And as business rebounded in the second half, we did not replenish inventory to optimal levels due to supply chain constraints, which also contributed to our above-average customer deposits and accounts payable during 2020. These working capital factors favorably impacted our cash flow from operations in 2020. Also, several non-recurring activities generated a net $13 million increase in cash in 2020. These included collection of the tariff recovery receivable, the deferred payroll taxes associated with the CARES Act, and insurance settlements, which were offset by the payment of legal matters and settlements.

At December 31, 2020, we had $214 million in liquidity, comprised of $170 million of cash and cash equivalents and $44 million of excess availability under the credit agreement. This represents an increase of liquidity of $103 million from December 31, 2019. At year end, we had $101 million in debt outstanding under our credit agreement, which is unchanged since we announced our ABL amendment in April 2020. Despite our strong current position, uncertainty in the near- to medium-term environment will require a sustained focus on maximizing liquidity. As a result, we have chosen to maintain a high cash balance at this time to provide financial flexibility as we manage through the current uncertain environment. We will continue to review this decision each quarter.

Turning now to 2021. Our team remains dedicated to our transformation, driving growth and improving profitability. We are pleased with our ability to manage costs and maintain a strong and flexible balance sheet during these uncertain and challenging times. As Charles noted, uncertainty surrounding the duration and extent of the COVID-19 pandemic makes it uniquely challenging to accurately forecast our future financial performance. As a result, we are not providing annual financial guidance for 2021.

I can, however, expand on some of the details that Charles touched on at a high level. From a sales perspective, we are planning to open 12 to 15 stores in 2021 versus closing net nine stores in 2020. Barring any COVID-19-related shutdowns, 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 into their homes. This will benefit gross margin dollars, but lower the gross margin rate.

With respect to SG&A, we plan to continue our expense management efforts and to invest behind our growth initiatives, including new technology and store service levels, to improve the customer experience, as well as opening new stores. As we demonstrated in 2020, if we see a severe downturn due to a widespread COVID-19 shutdown, we have the ability to adjust accordingly and very quickly reduce our expenses. While I cannot comment on a normal run rate for SG&A in 2021, I’d like to review several one-time events that impacted our SG&A in 2020. Recall that in the second quarter, in response to COVID-19, our adjusted SG&A expense was reduced by $16 million versus 2019, primarily due to lower advertising expense as we reduced our promotional cadence in response to the crisis. But also due to significantly lower payroll and benefits to align staffing with demand and temporary salary reductions for the corporate office personnel and the Board.

In the third quarter of 2020, our SG&A expenses were favorably impacted by a $2.5 million benefit from the final settlement of the business interruption insurance claim related to the August 2019 network security incident, partially offset by $1.8 million of store closure costs. And in the fourth quarter of 2020, our higher SG&A expense versus 2019 included $1.2 million of store closure costs and higher variable expenses related to stronger financial performance. I hope this gives you a better sense of some of the impacts to our SG&A in 2020.

For the full-year of 2021, we expect our effective tax rate will be approximately 25%, which reflects the statutory rate. In short, we remain focused on our profitability initiatives. We will work to reduce sourcing costs and improved pricing strategies to battle increased gross margin headwinds in 2021, and we are diligently managing expenses and investing behind our growth strategies that will position us as the customers’ first choice in hard-surface flooring with the ability to adjust to the macro environment as needed.

Our balance sheet and liquidity are strong, giving us the ability to invest in our growth initiatives in 2021. From a cash flow perspective, in 2021, we expect working capital to return to more traditional levels. We plan to increase our inventories to between $270 million and $290 million and we expect our customer deposits will return to more historical levels. In 2020, our capex spend was $16 million, and in 2019, it was $20 million. In 2021, we currently expect capex investments of up to $24 million to $28 million as our overall business results support the broad scale rebranding of our store fleet, the opening of 12 to 15 new stores and investments in digital.

As Charles stated, our entire organization remains focused on continuing to execute our transformation initiatives to ultimately drive profitability. We are looking to maximize financial and operational flexibility in an uncertain environment as we execute against our strategic initiatives.

Thank you all for your time this morning. With that, I’ll ask the moderator to open the call to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Laura Champine with Loop Capital Markets. Please proceed with your question.

Laura Champine — Loop Capital Markets — Analyst

Thanks for taking my question. Can you dig in a little more to the supply chain issues that robbed you a little bit of sales growth in Q4 and sort of talk about the pathway to fixing those?

Charles E. Tyson — President and Chief Executive Officer

Yeah. Laura, as many people have commented, the — we cut back on a significant amount of inventory as the COVID crisis unrolled. Obviously, to protect liquidity and we felt that that was the right thing to do. And, of course, that’s reflective across many industries that you can see where there are shortages of rural components. And so, that definitely drove a capacity constraint issue on containers, particularly out of Asia. And so, we work our contracts with our carriers and we will start to see that repair as we move through the first half of the year.

Also, a lot of the mills were impacted in their production of lumber. And so, on the solid domestic side, there is a tight availability on raw materials. So, there’s really two drivers, one, the international freight, particularly coming from Asia to both the West Coast and the East Coast and raw materials. So, as Nancy said, we expect to get back to more typical inventory levels in the back half of the year, but we do expect some headwinds for the balance of the front half of the year.

Laura Champine — Loop Capital Markets — Analyst

Got it. And this is just housekeeping, I may have missed it in Nancy’s comments, but can you give us the average sale in Q4?

Nancy Walsh — Chief Financial Officer

The average sale was just under $1,400.

Laura Champine — Loop Capital Markets — Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Brian Nagel — Oppenheimer & Co. — Analyst

Hi. Good morning. Nice quarter. The question I want to ask, Charles, you spent a lot of time talking about the opportunity Pro and the efforts of Lumber Liquidators to push into Pro. Can you just step back, what’s the biggest gating factor? Is it just sort of, say, cultural and effort on the part of your Company in your stores or there — is there something more that was going to take investment, whether it’s from a system standpoint or some other type of infrastructure spend?

Charles E. Tyson — President and Chief Executive Officer

Hey. Good morning, Brian. Yeah. So the answer to the question, Brian, is we think it’s both. We clearly have got to move our culture from this very high-low sales transactional experience with Pros to a relationship with Pros every day that were they’re answering the phone and meeting their needs and being able to offer a specialized service that they don’t find in — necessarily in other retail environment. But we have also got to build our capabilities. We started with our trial, scale and retention program that has back end reporting that allows a field leadership to be very specific in terms of, one, understanding the segmentation of our Pros, and how we connect on the data to see the progress we’re making with those Pros.

And as I said in my remarks, there are other areas of value proposition that we’ll be building through the year to make it easier for Pros to be able to transact with us in a relationship fashion. Hopefully, that helps.

Brian Nagel — Oppenheimer & Co. — Analyst

That was very helpful. And then, if I could just slip another one in. Look, I’m asking a lot of my covered companies this question. But if you look at the results reported fourth quarter, again very, very strong and clearly indicative to a certain extent of what efforts you’re taking. But how much do you think that the overall environment in this continued COVID environment has helped sales at your Company?

Charles E. Tyson — President and Chief Executive Officer

Yeah. That’s a great question and one we look at on a regular basis. And I think the answer to that question is, as we think about taking share over the long-term would still a highly fragmented independent space, 60% of the market is still highly fragmented. Clearly, there is a tailwind from home improvement. And, again, we’re watching very carefully. There are both positive tailwinds, I think, out there from a housing and interest rate perspective, and then potentially a negative based on what’s happening with COVID.

But we’ve got solid foundational growth work going on in our agendas, whether it’s our new digital platform, the investments we’ve been making digitally and in-store, which is really helping our teams be more productive. The work that we are doing foundationally in Pro. And then, of course, as we move through this year, a whole brand revitalization has been a critical element of repositioning us as a hard-surface specialty flooring company versus a company that’s got a name Lumber and Liquidator. So, there is a balance there, Brian.

Brian Nagel — Oppenheimer & Co. — Analyst

That’s very helpful. I appreciate all the color. Thank you.

Charles E. Tyson — President and Chief Executive Officer

Thanks, Brian.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.

Seth Basham — Wedbush Securities — Analyst

Thanks a lot, and good morning. My question is around tariffs. What percentage of your sales were impacted by the reinstituted higher tariffs in the fourth quarter? And as we look at 2021, do you expect all of your sales to be impacted by this?

Nancy Walsh — Chief Financial Officer

So, as we mentioned in our remarks, excluding the $13 million benefit from the retroactive exclusion of the tariffs in Q4 of last year, our gross margin rate expanded 200 basis points. That said, the impact of our weighted average cost accounting, we expect to see a bigger headwind from the reinstatement of the 25% tariffs in Q1 going forward.

We are continuing to pursue our mitigation strategies, leveraging best country-sourcing, which remains key to our mitigation strategy. As we noted, our imports from China were down to 34% compared to 46% during the full-year of 2019. So, we are working with vendors to launch new projects — products, excuse me, and we’re also looking to offset higher sourcing costs through pricing and promotional strategies while we monitor the market to inform and guide our decisions going forward.

Seth Basham — Wedbush Securities — Analyst

So just to follow-up on that. Somewhere less than 34% of your sales were impacted by the higher tariffs in the fourth quarter and in the first quarter 2021 and beyond. Should we be thinking about 34% or is it significantly lower number than that?

Nancy Walsh — Chief Financial Officer

We are not going to breakout anything further for 2021. What we’re just indicating is that, there is not — there is going to be a greater impact to Q1 going forward because of the way that we account for the product and the tariffs hitting it. So, we had tariffs in Q4, but you won’t really see the impact of that until Q1 going forward.

Charles E. Tyson — President and Chief Executive Officer

And, Seth, let me just usher, as I said in my remarks, right, we’re really looking at our ability to continue to look at alternative country-sourcing, but we’re also looking at government policy. And what will happen long-term to the tariff environment, what will happen with trading in China, there’s a lot of discussions going on with Biden’s administration today. Will there be a change? And so, that doesn’t put us on pause in terms of continuing to find quality suppliers in different tariffed environment countries.

Seth Basham — Wedbush Securities — Analyst

Understood. Thank you very much.

Charles E. Tyson — President and Chief Executive Officer

Thanks, Seth.

Operator

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Peter Keith — Piper Sandler — Analyst

Hi. Thanks. Good morning, everyone. So, Charles, you had talked about with the 20 rebranded store tests that you were seeing, I guess, some qualitative measures of being more approachable, more relevant. Is there any quantitative measure you could give us specifically, was there any notable change in same-store sales versus the non-rebranded stores? And then with the broader rebranding effort, at a high-level, what does that look like over the next couple of months here?

Charles E. Tyson — President and Chief Executive Officer

Yeah. Peter, thanks for the question. Great question. So, as we think about where we’re positioning our brand, the launch of our new website, for example, is focused on LL Flooring. And I will start to translate down through the search environment, for example, where customers will see LL Flooring and that will continue to intensify as we move through the year.

As I said in my remarks, we are intending to start a broader rollout of the rebranding of our stores, because it was both qualitative and quantitative against control stores. We were happy with the results that we’re seeing. And we believe that driving this brand evolution over the next 12 months to 18 months will make us more relevant in the marketplace. The feedback we got from customers was a perception of quality, of expertise and traffic results reflected that. And so, again, it’s a longer journey. It’s not just the next two months, Peter. We see this as being part of our transformation and part of our work over the next 18 months.

Peter Keith — Piper Sandler — Analyst

Okay. That’s helpful. And then, I know you’re not providing any guidance, you provided some — maybe some guardrails we’ll call it. But how should we think about overall gross margin? There does seem to be some notable puts and takes with the tariffs, the transportation and then your ability to adjust pricing. Is there any way that gross margin would be up this year or the headwinds too extreme?

Nancy Walsh — Chief Financial Officer

Again, we’re not really giving specific detail in terms of gross margin. We’re just indicating that there are headwinds, both related to tariffs, as well as some of the transportation disruptions that Charles talked about. But coming into or coming out of Q4, we had a 200 basis point improvement compared to 2019. So, our mitigation strategies that Charles mentioned are showing good work in terms of, particularly our country-sourcing, but as well as we work with vendors to launch new projects — products, I cannot get that word out, excuse me, and offsetting the higher sourcing costs through pricing and promotion strategies that will monitor the market. So there is a number of headwinds and tailwinds and we’re just moving forward with our mitigation strategies.

Peter Keith — Piper Sandler — Analyst

Okay. Thank you. Good luck.

Charles E. Tyson — President and Chief Executive Officer

Thanks, Peter.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Tyson for final comments.

Charles E. Tyson — President and Chief Executive Officer

Thanks, everyone, for joining us today. Again, I want to thank all of our associates for everything they’re doing to help us and our business during these difficult times. I want to reiterate that we’re excited by the strong sales growth and profit performance in 2020 and we’re confident in our transformation strategy and our ability to quickly adapt to this dynamic operating environment.

Wishing everyone good health and safety. And we look forward to talking to you at our next update. Thank you. Have a great day.

Operator

[Operator Closing Remarks]