After covering the mess Knowles and the management team has done with “mitigating” tariffs, I think it’s a good idea to look into the absolute disaster in the marketing department. For the home players, you should know that Knowles and Co. have mentioned their focus on Pro customer and their installation program non-stop for the past 2 years. But oddly enough, when you look at the company’s financials, same store sales are barely moving up at all, and last quarter, they were negative. And for the rest of 2019, we will be lucky to be positive at all. How could that be, if Pro and Install are doing so well? It’s because Lumber Liquidators’ DIY consumer sales, which has historically been the core market, and main growth driver, are dropping.

But why are DIY sales dropping?

There are 2 main reasons

  1. The advertising budget has been slashed.
  2. The advertising sucks.

For today, let’s just talk about problem #1

Slashed Advertising Budget

The following chart shows historic LL ad spends by year.

2010 – $49,797

2011 – $52,345

2012 – $58,548

2013 – $75,506

2014 – $82,604

2015 – $77,455 – Drop due to lower sales (scandals, etc…)

2016 – $80,079 – Rebound due to increasing sales after scandals.

2017 – $76,586 – Knowles becomes CEO….

2018 – $74,242 – Knowles cuts ad spending again!

2018 – Q3 – Sales miss estimates by a wide margin.

2018 – Q4 – Sales miss estimates again.

2019 – Q1 – SSS are negative…

Ad spending in 2018 was the lowest in 6 years. Of Course, Knowles said that cutting ad spending was a good thing, because he was going to spend those ad dollars more efficiently. But same store sales dropped in Q1 2019. And in Q3 2018, sales missed targets by a wide margin, coming in at only 2.1% while analysts were projecting 4.9%. And the stock collapsed on the news. Q4 2018 sales missed too. And Q1 2019 same store sales were actually negative.

Knowles vs Knowles

Excerpt from Q1 2018 Conference Call (source)

Seth M. Basham – Wedbush Securities, Inc.

You referenced some changes in your promotional programs. You’re expecting strong promotional programs going forward. Could you give us a little bit more color as to what you’re planning for the balance of the year?

Dennis R. Knowles – Lumber Liquidators Holdings, Inc.

Seth, I’m sure my competition would like to know that too.

Dennis, if you’re competitors want to know what your “secret sauce” is, it’s only because they want to avoid repeating your mistakes. The only thing that competitors would learn from your fiasco, is what not to do.

Seth M. Basham – Wedbush Securities, Inc.

Fair enough. So, as we look at the buckets of advertising spend and promotional dollars, do you expect both of those to be up for the year or how are you planning those going forward to drive the traffic that you’re looking for?

Martin D. Agard – Lumber Liquidators Holdings, Inc.

Yeah. I mean, up a little bit, I would say, yes.

Dennis R. Knowles – Lumber Liquidators Holdings, Inc.

I think you might see the dollars move around the buckets. You’ll see – my plan is to increase dollars, but not necessarily to increase a percent of – I mean, it’s got to work. And so, we don’t want to drive – we want to keep our ratio as flat as possible, but we will increase dollars. And we will test a fair amount this year as it relates to some of the digital capabilities, but we still expect to leverage total SG&A and we’ll just be leaning into our advertising spend.

Dennis clearly said in Q1 2018 that he would “increase dollars” spent on advertising. Yet, advertising dropped in 2018, and it led to a huge sales miss in 2018 and that sales miss is continuing in 2019, as the stock craters. Dennis blatantly lied.

In the Q2 Conference Call Dennis Knowles repeated: (source)

Dennis R. Knowles – Lumber Liquidators Holdings, Inc.

I did mention last quarter that we would likely be more assertive with our advertising dollars in 2018 now that our basic infrastructure is in place.

But in Q3, Dennis had this to say (Source)

Dennis R. Knowles – Lumber Liquidators Holdings, Inc.

So, we tweaked advertising down slightly and tested some advertising initiatives we’ve been eager to try.

We are working tirelessly to improve our intelligence around advertising.

Analysts were quick to pick up on the link between the drop in advertising and the drop in traffic.

Seth M. Basham – Wedbush Securities, Inc.

My first question is around traffic. It seems like traffic has been a challenge for you guys recently. You called out a number of issues why it might be, but as you think about tweaking the price and promotion and advertising strategies going forward, do you expect to have a meaningful impact in turning around the traffic declines in the near-term?

Dennis R. Knowles – Lumber Liquidators Holdings, Inc.

I would say, as kind of Marty mentioned in his remarks, we’ve looked at traffic really hard over the last, I guess, really over the course of the last three quarters. And we have seen as he mentioned some changing dynamics and that’s impacted by how we promote. And if you we deep into price and not so wide in breadth, we typically can influence traffic, but we just haven’t been happy with the margin. Typically, I would say, historically, we’ve had what I would call more deal-focused promotions as opposed to really kind of advertising across the category.

More Promises From Knowles and his Merry Men

In Q4 2018, Knowles assured shareholders that advertising would be up in 2019. I like the way they promise, then fail to deliver, and then extend a new promise.

Dennis R. Knowles – Lumber Liquidators Holdings, Inc. (source)

Second, with these with the major legacy legal issues behind us, we have the opportunity to increase our advertising spend this year

Of course, by now, with the stock price in the single digits, people have started to ask questions… One analyst seems surprised by the rapid drop in advertising:

Budd Bugatch

Okay and when I look at advertising, I think it’s down to 6.84 % reported for the year down, I think 60 basis points year-over-year. Historically, Lumber Liquidators has – advertising as high as high as 11% to 12% if I remember right going back a number of years, what the right level of advertising for this business now?

Dennis has reassuring words.

Dennis Knowles

This is Dennis, I would add a little color to that as well as that, as Charles has built out this digital team and our digital approach to marketing, we’ve had to make some investments in that team and pull back on advertising.

What Dennis effectively said is that he reduced advertise spending in order to increase payroll in the advertising department. Let that sink in. He is hiring employees in the digital advertising team, instead of simply advertising products. So payroll increases, advertising decreases and sales drop. That is the Knowles’ formula for success… leading to a single digit stock price. Note that Charles Tyson joined Lumber Liquidators in 2018 and is in charge of advertising. His compensation was $1.44 million. Maybe that money should have been simply spent on more advertising.

If the company was so desperate to expand the size of the “Digital Team,” why not just spend money to grow that team, and also spend money to increase advertising? Sure, that would increase costs at the company, but costs don’t actually seem to be a huge concern, as Adjusted SG&A has ballooned almost $20 million in the last 2 years anyway. And the advertising expense would have at least been offset by increased sales and net net profit dollars.

The issue here is poor planning and even worse execution by the CEO, Dennis Knowles. He has made decisions which have had direct, negative impacts on the business and his mismanagement is the leading cause of the company losing over 70% of its market value over the last 18 months, leading to huge losses for investors.

Let’s Change Management at LL and Finally Turn This Company Around

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