LL FLOORING HOLDINGS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

0

Caution Regarding Forward-Looking Statements

This report includes statements of the Company's expectations, intentions, plans
and beliefs that constitute "forward-looking statements" within the meanings of
the Private Securities Litigation Reform Act of 1995. These statements, which
may be identified by words such as "may," "will," "should," "expects,"
"intends," "plans," "anticipates," "believes," "thinks," "estimates," "seeks,"
"predicts," "could," "projects," "potential" and other similar terms and
phrases, are based on the beliefs of the Company's management, as well as
assumptions made by, and information currently available to, the Company's
management as of the date of such statements. These statements are subject to
risks and uncertainties, all of which are difficult to predict and many of which
are beyond the Company's control. These risks include, without limitation, the
impact on us of any of the following:

? a prolonged period of inflation impacting the cost of products and consumer spending;

? reduction in consumer spending due to inflation and consumer confidence;

? transportation availability and costs;

? failure to execute our key initiatives or these key initiatives

deliver the desired results;

? our respect, and that of our suppliers, of complex and evolving rules,

federal, state and local regulations and laws;

? potential supply chain disruptions related to forced labor and other trade

regulations;

? inability to hire and/or retain employees;

obtain products from abroad, including the effects of the COVID-19 pandemic

 ? and tariffs, delays in shipping, as well as the effects of antidumping and
   countervailing duties;


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? inability to equip stores due to the COVID-19 pandemic and the

labor market pressures;

? the outcome of legal proceedings and the related impact on liquidity;

? the impact of war on Ukraine on transport costs and

   European suppliers;


 ? reputational harm;


? disruptions due to cybersecurity threats, including any impact of a network

security incident;

? inability to open new stores, find suitable locations for new stores and finance

other capital expenditure;


 ? managing growth;


 ? damage to our assets;

? disruption of our ability to distribute our products, in particular due to serious

Weather report;

? operation of an office China;

? manage third-party installers and product delivery companies;

? renew store, warehouse or other corporate leases;

? having enough suppliers;

? product liability claims, marketing substantiation claims, wage and hour

claims, job classification claims and other labor and employment claims;

? have sufficient inventory for consumer demand;

? availability of suitable hardwood, especially due to disturbances

severe weather impacts;

? sufficient insurance coverage, including cybersecurity insurance;

? access to capital and costs of capital;

the handling of confidential customer information, including the impacts

? the California Consumer Privacy Act and other applicable data privacy laws and

regulations;

? disruptions to management information systems;

? alternative e-commerce offers;

? our overall advertising and marketing strategy, including consumer anticipation

   trends;


 ? competition;


impact of changes in accounting and regulatory guidelines, including

? implementation guidelines and interpretations related to environmental, social,

and Governance (“ESG”);

? internal controls;

? stock price volatility; and

? anti-takeover provisions.

Information regarding risks and uncertainties is contained in the Company’s reports filed with the SECONDincluding Item 1A, “Risk Factors” section of this Quarterly Report and Form 10-K for the year ended December 31, 2021.

This management discussion should be read in conjunction with the financial
statements and notes included in Part I, Item 1. "Financial Statements" of this
quarterly report and the audited financial statements and notes and management
discussion included in the Company's annual report filed on Form 10-K for
the year ended December 31, 2021.

Insight


LL Flooring is one of the leading specialty retailers of hard-surface flooring
in the U.S. with 437 stores as of June 30, 2022. Our Company seeks to offer the
best customer experience online and in stores, with more than 500 varieties of
hard-surface floors featuring a range of quality styles and on-trend designs.
Our online tools also help empower customers to find the right solution for the
space they've envisioned. Our extensive selection includes waterproof hybrid
resilient, waterproof vinyl plank, solid and engineered hardwood, laminate,
bamboo, tile, and cork, with a wide range of flooring enhancements and
accessories to complement. Our stores are staffed with flooring experts who
provide advice, Pro partnership services and installation options for all of our
products, the majority of which is in stock and ready for delivery. Our vision
is to be customers' first choice in hard-surface flooring by providing the best
experience, from start to finish. We offer a wide selection of high-quality,
locally 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.

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To supplement the financial measures prepared in accordance with U.S. generally
accepted accounting principles (GAAP), the Company uses the following non-GAAP
financial measures: (i) Adjusted Gross Profit; (ii) Adjusted Gross Margin; (iii)
Adjusted SG&A; (iv) Adjusted SG&A as a Percentage of Net Sales; (v) Adjusted
Operating Income; (vi) Adjusted Operating Margin; (vii) Adjusted Other Expense;
(viii) Adjusted Other Expense as a Percentage of Net Sales; (ix) Adjusted
Earnings; and (x) Adjusted Earnings per Diluted Share. These non-GAAP financial
measures should be viewed in addition to, and not in lieu of, financial measures
calculated in accordance with GAAP. These supplemental measures may vary from,
and may not be comparable to, similarly titled measures by other companies.

The non-GAAP financial measures are presented because management uses these
non-GAAP financial measures to evaluate our operating performance and, in
certain cases, to determine incentive compensation. Therefore, we believe that
the presentation of non-GAAP financial measures provides useful supplementary
information to, and facilitates additional analysis by, investors. The presented
non-GAAP financial measures exclude items that management does not believe
reflect our core operating performance, which include store closures, regulatory
and legal settlements and associated legal and operating costs, and changes in
antidumping and countervailing duties, as such items are outside of our control
due to their inherent unusual, non-operating, unpredictable, non-recurring, or
non-cash nature.

Second Quarter Financial Highlights

Net sales of $299.0 million decreased by 0.8% compared to the same period

? year, with record growth in sales to Pro customers partially offsetting a decline

consumer sales and a 1.1% decline in net service sales.

Total comparable store sales decreased 3.1% compared to the same period last year.

? The decline in comparable store sales primarily reflects the same factors as

change in net sales.

Gross margin of 35.7% decreased 170 basis points as a percentage of sales

compared to the same period last year, adjusted gross margin (a non-GAAP

measure) of 36.1% decreased by 130 basis points compared to the same period

? the year, mainly reflecting a significant increase in the consumption of materials and transport

costs (collectively up more than 1,000 basis points) that the Company was able to

to partially mitigate through pricing, promotion and another country/provider

procurement strategies.

SG&A expense as a percentage of sales of 34.1% increased 220 basis points

compared to the second quarter of last year. Adjusted SG&A fee (a non-GAAP

measure) as a percentage of sales of 34.1% increased by 230 basis points compared to

? in the second quarter of last year, mainly thanks to investments aimed at supporting

the Company’s long-term growth, higher advertising spend due to timing

ongoing promotions and investments in customer service and distribution center

staff.

Operating margin of 1.6% decreased by 390 basis points compared to the second

? quarter of last year. Adjusted operating margin (a non-GAAP measure) of 2.0%

decreased by 360 basis points compared to the second quarter of last year.

Diluted EPS of $0.09 per diluted share decreased $0.32 per diluted share

? compared to the second quarter of last year. Adjusted earnings per diluted

share (a non-GAAP measure) of $0.13 decreases $0.28 compared to the second

quarter of last year.

? During the second quarter, the Company opened six new stores, bringing the total

stores at 437 from June 30, 2022.

Other items

Liquidity and credit agreement

From June 30, 2022we had cash $187 millionconsisting of excess availability under our credit agreement of $182 millionand the cash and cash equivalents of $5 million. This represents a decrease in the liquidity of $40 million of December 31, 2021. During the first half of the year, the Company rebuilt its inventory by more than $104 million.

In February 2022the Board of Directors of the Company has lifted its authorization for the buyback of a maximum of $50 million ordinary shares of the Company since the previous $14 million authorized. In April 2022the company


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resumed its share repurchase program. The Company has repurchased $7 million
under that program, underscoring its confidence in its long-term net sales and
profitability growth.

We believe that cash flows from operations, together with cash on hand, and the
availability under our Credit Agreement will be sufficient to meet our
obligations, fund our settlements, operations, anticipated capital expenditures,
and potential share repurchases for the next 12 months. We prepare our
forecasted cash flow and liquidity estimates based on assumptions that we
believe to be reasonable but are also inherently uncertain. Actual future cash
flows could differ from these estimates.

Impact of the macroeconomic environment


We continue to navigate uncertainty in the macroeconomic environment related to
inflation, consumer spending, global supply chain disruptions, COVID-19, and a
challenging labor market. We anticipate material and transportation costs to
remain inflated, exacerbated by the war in Ukraine, throughout 2022. We are also
monitoring the impact of inflation on consumer purchasing trends as it could
affect our prices, demand for our products, our sales and our profit margins.

Section 301 Tariffs


The Company's financial statements have been impacted by Section 301 tariffs on
certain products imported from China in recent years. The tariffs flow through
the income statement as the product is sold. The Company has deployed strategies
to mitigate tariffs and improve gross margin, primarily through adjusting its
pricing and promotion strategies and alternative country sourcing. During the
second quarter of 2022, the Company reduced the percent of merchandise receipts
subject to Section 301 tariffs to 12% from 22% during the second quarter of
2021.

As discussed in Section 1, Note 7 of the condensed consolidated financial statements, the Company is unable to predict the timing or outcome of the USTR and/or CIT decision. If these appeals are successful, the Company should be entitled to refunds on these Section 301 rates.

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Results of Operations

We believe the selected sales data, the percentage relationship between net
sales and major categories in the condensed consolidated statements of
operations and the percentage change in the dollar amounts of each of the items
presented below are important in evaluating the performance of our business
operations.

                                                                                                  % Improvement
                                                               % of Net Sales                      (Decline) in
                                                        Three Months Ended June 30,               Dollar Amounts
                                                     2022                     2021                 2022 VS 2021
Net Sales
Net Merchandise Sales                                      86.2 %                       86.1 %               (0.8) %
Net Services Sales                                         13.8 %                       13.9 %               (1.1) %
Total Net Sales                                           100.0 %                      100.0 %               (0.8) %
Gross Profit                                               35.7 %                       37.4 %               (5.3) %
Selling, General, and Administrative Expenses              34.1 %                       31.9 %                 6.2 %
Operating Income                                            1.6 %                        5.5 %              (71.9) %
Other Expense                                               0.1 %                        0.2 %              (60.2) %
Income Before Income Taxes                                  1.5 %                        5.3 %              (72.3) %
Income Tax Expense                                          0.6 %                        1.3 %              (58.1) %
Net Income                                                  0.9 %                        4.0 %              (77.2) %

                                                                                                  % Improvement
                                                               % of Net Sales                      (Decline) in
                                                         Six Months Ended June 30,                Dollar Amounts
                                                     2022                     2021                 2022 VS 2021
Net Sales
Net Merchandise Sales                                      86.8 %                       87.1 %               (1.5) %
Net Services Sales                                         13.2 %                       12.9 %                 1.2 %
Total Net Sales                                           100.0 %                      100.0 %               (1.2) %
Gross Profit                                               36.5 %                       39.0 %               (7.7) %
Selling, General, and Administrative Expenses              34.8 %          
            34.0 %                 1.3 %
Operating Income                                            1.7 %                        5.1 %              (67.3) %
Other Expense                                               0.0 %                      (0.0) %             (167.9) %
Income Before Income Taxes                                  1.6 %                        5.1 %              (68.2) %
Income Tax Expense                                          0.5 %                        1.2 %              (62.6) %
Net Income                                                  1.2 %                        3.9 %              (70.0) %


                                                 Three Months Ended           Six Months Ended
                                                     June 30,                    June 30,
                                                  2022         2021           2022        2021
SELECTED SALES DATA
Average Sale1                                  $     1,860    $ 1,564       $   1,777    $ 1,488
Comparable Stores (Decrease) Increase2               (3.1) %     31.3 %         (3.3) %     18.2 %
Transaction Count (Decrease) Increase3              (22.0) %      2.0 %        (16.7) %      2.3 %
Average Retail Price per Unit Sold Increase4          14.7 %      9.9 %    

12.5% ​​6.8%

Number of Stores Open, end of period                   437        416             437        416
Number of Stores Opened in Period, net                   6          4              13          6
Number of Stores Relocated in Period5                    1          -      

1 –

1 Average revenue is defined as the average invoiced customer order, measured

quarterly, excluding returns as well as transactions under $100 (which are

usually examples of commands or additions/accessories to existing commands).


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2 A store is generally considered comparable to the first day of the thirteenth

full calendar month after opening.

3 The number of transactions is calculated by applying the average sale to the total net sales

in comparable stores.

4 Average retail price per unit (square feet for floors and other floor units)

measures for moldings and accessories) sold is calculated on a company total

and excludes non-merchandise revenue.

5 A relocated store remains a comparable store as long as it is relocated to

  the primary trade area.


Net Sales

Second quarter 2022 net sales of $299.0 million decreased $2.4 million, or 0.8%,
versus the second quarter of 2021. Net merchandise sales and net service sales
decreased 0.8% and 1.1%, respectively.

Average ticket increased 18.9%, primarily reflecting higher merchandise average
ticket. The higher merchandise average ticket was driven primarily by pricing
and promotion strategies as well as favorable product mix, reflecting the launch
of our new Duravana performance flooring brand.

Comparable store sales for the second quarter of 2022 decreased 3.1% from the
second quarter of 2021. The Company reported record sales to Pro customers,
which partially offset a decrease in sales to consumers and a 1.1% decrease in
net service sales. The year-over-year decrease in comparable store sales
reflected continued lower spending by consumers versus last year, which we
believe reflected pressure from inflation and higher interest rates, and their
preference to spend more on travel and entertainment.

During the second quarter of 2022, the Company opened six new stores bringing the total number of stores to 437 as of June 30, 2022.


Net sales for the six months ended June 30, 2022 decreased 1.2% from the six
months ended June 30, 2021. Net merchandise sales decreased 1.5%, partially
offset by an increase in net service sales of 1.2% over the same period in 2021.
Comparable store sales for the six months ended June 30, 2022 decreased 3.3%
from the same period in 2021.

Gross profit

Gross profit decreased 5.3% in the second quarter of 2022 to $106.8 million from
$112.7 million in the comparable period in 2021, and gross margin decreased 170
basis points to 35.7% in the second quarter of 2022 from 37.4% in the second
quarter of 2021. For the second quarter of 2022, the Company reported an
unfavorable $1.2 million impact from anti-dumping duty rate changes compared to
the prior-year period. Excluding these items as shown on the table that follows,
adjusted gross margin (a non-GAAP measure) of 36.1% decreased 130 basis points
compared to the same period last year, primarily reflecting significantly higher
material and transportation costs (collectively up more than 1,000 basis points)
that the Company was able to partially mitigate through pricing, promotion and
alternative country/vendor sourcing strategies.

Gross profit decreased 7.7% in the first six months of 2022 to $210.8 million
from $228.3 million in the comparable period in 2021 and gross margin decreased
250 basis points to 36.5% in the first six months of 2022 from 39.0% in the
first six months of 2021. For the first six months of 2022, the Company reported
an unfavorable $1.0 million impact from anti-dumping duty rate changes, compared
to income of $6.6 million in the prior-year period. Excluding these items as
shown on the table that follows, adjusted gross margin (a non-GAAP measure) of
36.7% decreased 120 basis points compared to the same period last year,
primarily reflecting significantly higher material and transportation costs
(collectively up more than 1,000 basis points) that the Company was able to
partially mitigate by pricing, promotion and alternative country/vendor sourcing
strategies.

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We believe that the following items set forth in the table below can distort the
visibility of our ongoing performance and that the evaluation of our financial
performance can be enhanced by use of supplemental presentation of our results
that exclude the impact of these items.

                                             Three Months Ended                                     Six Months Ended
                                                 June 30,                                              June 30,
                                      2022                       2021                        2022                      2021
                                $         % of Sales       $         % of Sales        $        % of Sales       $        % of Sales

                                           (dollars in thousands)                                (dollars in thousands)
Gross Profit/Margin, as
reported (GAAP)              $ 106,750          35.7 %  $ 112,730          37.4 %   $ 210,829         36.5 %  $ 228,322         39.0 %

Antidumping Adjustments1         1,218           0.4 %          -             - %         977          0.2 %    (6,566)        (1.1) %

Adjusted Gross
Profit/Margin (non-GAAP
measures)                    $ 107,968          36.1 %  $ 112,730          37.4 %   $ 211,806         36.7 %  $ 221,756         37.9 %

1 Represents anti-dumping expenditures associated with applicable prior year shipments

engineered hardwood China.

Selling, general and administrative expenses


SG&A expense for the second quarter of 2022 increased $6.0 million to $102.1
million, or 34.1% of sales, compared to $96.1 million, or 31.9% of sales, in the
second quarter of 2021. Adjusted SG&A (a non-GAAP measure) for the second
quarter of 2022 was $102.1 million, compared to $95.8 million in the second
quarter of 2021. As a percentage of sales, adjusted SG&A increased 230 basis
points, to 34.1% of sales, compared to 31.8% for the second quarter in 2021,
which is primarily driven by investments to support the Company's long-term
growth, higher advertising expense due to the timing of promotions, and
continued investment in customer facing and distribution center personnel.

SG&A expense for the first six months of 2022 increased $2.5 million to $201.1
million, or 34.8% of sales, compared to $198.6 million, or 34.0% of sales, in
the first six months of 2021. SG&A in the first six months of 2021 included
certain costs related to legal matters and settlements. Excluding these items as
shown in the table that follows, adjusted SG&A (a non-GAAP measure) for the
first six months of 2022 was $201.1 million, compared to $190.5 million in the
first six months of 2021. As a percentage of sales, adjusted SG&A increased 220
basis points, to 34.8% of sales, compared to 32.6% for the first six months in
2021, reflecting the same drivers as the quarter. The Company redeemed $2.0
million and $2.3 million of MDL and Gold vouchers during the first six months of
2022 and 2021, respectively, and relieved the accrual for legal matters and
settlements for the full amount, relieved inventory at its cost, and the
remaining amount -- the gross margin for the items sold of $0.7 million in 2022
and $0.8 million in 2021 -- was recorded as a reduction in SG&A expense.

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We believe that the following items set forth in the table below can distort the
visibility of our ongoing performance and that the evaluation of our financial
performance can be enhanced by use of supplemental presentation of our results
that exclude the impact of these items.

                                            Three Months Ended                                      Six Months Ended
                                                 June 30,                                              June 30,
                                      2022                       2021                       2022                       2021
                                $         % of Sales       $        % of Sales        $         % of Sales       $         % of Sales

                                          (dollars in thousands)                                 (dollars in thousands)
SG&A, as reported (GAAP)     $ 102,087          34.1 %  $ 96,116          31.9 %   $ 201,112          34.8 %  $ 198,602          34.0 %

Accrual for Legal Matters
and Settlements2                     -             - %         -             - %           -             - %      7,675           1.3 %
Legal and Professional
Fees3                                -             - %       279           0.1 %           -             - %        427           0.1 %
Sub-Total Items above                -             - %       279           0.1 %           -             - %      8,102           1.4 %

Adjusted SG&A (a non-GAAP
measure)                     $ 102,087          34.1 %  $ 95,837          31.8 %   $ 201,112          34.8 %  $ 190,500          32.6 %

2 This amount represents the allocation to the results of the Mason and Savidas business

recorded in the first half of 2021, which are described in more detail in point 1,

Note 7 to the condensed consolidated financial statements.

3 Represents charges to earnings related to our defense of certain

legal actions during the period. This does not include any legal fees incurred

by the company.

Operating profit and operating margin


Operating income was $4.7 million for the second quarter of 2022 compared to
$16.6 million for the second quarter of 2021. Adjusted operating income (a
non-GAAP measure) in the second quarter of 2022 was $5.9 million, down $11.0
million from the $16.9 million for the prior-year period. As a percentage of net
sales, adjusted operating margin (a non-GAAP measure) for the second quarter of
2022 was 2.0%, down 360 basis points from 5.6% in the second quarter of 2021,
which reflected the increased selling, general and administrative expenses and
decreased gross margin as described in the above sections.

Operating income was $9.7 million for the first six months of 2022 compared to
$29.7 million for the first six months of 2021. Adjusted operating income (a
non-GAAP measure) in the first six months of 2022 was $10.7 million, down $20.6
million from the $31.3 million for the prior-year period. As a percentage of net
sales, adjusted operating margin (a non-GAAP measure) for the first six months
of 2022 was 1.9%, down 340 basis points from 5.3% in the first six months of
2021, which reflected the increased selling, general and administrative expenses
and decreased gross margin as described in the above sections.

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We believe that the following items set forth in the table below can distort the
visibility of our ongoing performance and that the evaluation of our financial
performance can be enhanced by use of supplemental presentation of our results
that exclude the impact of these items.

                                              Three Months Ended                                         Six Months Ended
                                                   June 30,                                                  June 30,
                                       2022                        2021                          2022                        2021
                                $        % of Sales         $          % of Sales         $        % of Sales         $           % of Sales

                                            (dollars in thousands)                                    (dollars in thousands)
Operating Income, as
reported (GAAP)               $ 4,663             1.6 %  $ 16,614             5.5 %    $  9,717             1.7 %  $  29,720             5.1 %

Gross Margin Items:
Antidumping Adjustments1        1,218             0.4 %         -               - %         977             0.2 %    (6,566)           (1.1) %
Gross Margin Subtotal           1,218             0.4 %         -               - %         977             0.2 %    (6,566)           (1.1) %

SG&A Items:
Accrual for Legal Matters
and Settlements2                    -               - %         -               - %           -               - %      7,675             1.3 %
Legal and Professional
Fees3                               -               - %       279             0.1 %           -               - %        427             0.1 %
SG&A Subtotal                       -               - %       279             0.1 %           -               - %      8,102             1.4 %

Adjusted Operating
Income/Margin (a non-GAAP
measure)                      $ 5,881             2.0 %  $ 16,893             5.6 %    $ 10,694             1.9 %  $  31,256             5.3 %

1,2,3 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.

Other expenses (income)


In the second quarter of 2022, we had other expense of $0.2 million compared to
other expense of $0.5 million for the second quarter of 2021. Adjusted other
expense (a non-GAAP measure) was $0.1 million for the second quarter of 2022,
which is a decrease of $0.4 million compared to the second quarter of 2021
driven by the decrease in outstanding debt during the quarter compared to prior
year.

The Company had other expense of $0.2 million for the first six months of 2022
compared to other income of $0.3 million for the comparable period in 2021. Both
years included interest on borrowings on our Credit Agreement. Adjusted other
expense (a non-GAAP measure) was $0.2 million for the first six months of 2022,
which is a decrease of $1.4 million compared to the first six months of 2021
driven by a favorable adjustment in 2021 of $1.8 million for the reversal of
interest expense associated with an anti-dumping duty rate refund.

We believe that the following item set forth in the table below can distort the
visibility of our ongoing performance and that the evaluation of our financial
performance can be enhanced by use of supplemental presentation of our results
that exclude the impact of these items.

                                                Three Months Ended                               Six Months Ended
                                                    June 30,                                        June 30,
                                            2022                  2021                    2022                    2021
                                      $      % of Sales     $      % of Sales       $      % of Sales       $        % of Sales

                                              (dollars in thousands)                           (dollars in thousands)
Other Expense (Income), as
reported (GAAP)                      $ 199          0.1 %  $ 498          

0.2% $184 0.0% $(270) (0.0)%


Interest impact related to
antidumping adjustment4                 83          0.0 %      -            - %      (2)        (0.0) %    (1,841)        (0.3) %
Sub-Total Items above                   83          0.0 %      -           

-% (2) (0.0)% (1,841) (0.3)%


Adjusted Other Expense/Adjusted
Other Expense as a % of Sales (a
non-GAAP measure)                    $ 116          0.0 %  $ 498          

0.2% $186 0.0% $1,571 0.3%

4 Represents the impact on interest income of certain anti-dumping adjustments

  related to applicable prior-year shipments of engineered hardwood from China.


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Provision for Income Taxes

The Company calculates its quarterly tax provision pursuant to the guidelines in
Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC
740-270 requires companies to estimate the annual effective tax rate for current
year ordinary income. The estimated annual effective tax rate represents the
best estimate of the tax provision in relation to the best estimate of pre-tax
ordinary income or loss. The estimated annual effective tax rate is then applied
to year-to-date ordinary income or loss to calculate the year-to-date interim
tax provision and is adjusted for discrete items that occur within the period.

For the three months ended June 30, 2022, the Company recognized income tax
expense of $1.7 million, which represented an effective tax rate of 38.7%. For
the three months ended June 30, 2021, the Company recognized income tax expense
of $4.1 million, which represented an effective tax rate of 25.6%. The higher
effective tax rate in the current period primarily reflects the greater impact
of permanent items on the lower pretax ordinary income.

For the six months ended June 30, 2022, the Company recognized income tax
expense of $2.8 million, which represented an effective tax rate of 29.0%. For
the six months ended June 30, 2021, the Company recognized income tax expense of
$7.4 million, which represented an effective tax rate of 24.6%. The higher
effective tax rate is caused by the same drivers of the increase in effective
tax rate for the quarter.

The Company has recorded a valuation allowance on some of its net deferred tax assets of $2.4 million of the June 30, 2022 because the jurisdiction and the nature of the assets make the realization of these deferred tax assets uncertain. The Company intends to maintain this valuation allowance on its deferred tax assets until there is sufficient evidence to support the realization of these deferred tax assets.

Net earnings per diluted share

Net income per diluted share was $0.09 for the three months ended June 30, 2022,
compared to $0.41 for the three months ended June 30, 2021. Adjusted earnings
per diluted share was $0.13 for the three months ended June 30, 2022, compared
to $0.41 for the three months ended June 30, 2021.

Net income per diluted share was $0.23 for the six months ended June 30, 2022,
compared to $0.77 for the six months ended June 30, 2021. Adjusted earnings per
diluted share was $0.26 for the six months ended June 30, 2022, compared to
$0.76 for the six months ended June 30, 2021.

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We believe that each of the items below can distort the visibility of our
ongoing performance and that the evaluation of our financial performance can be
enhanced by use of supplemental presentation of our results that exclude the
impact of these items.

                                            Three Months Ended            Six Months Ended
                                                 June 30,                    June 30,
                                           2022             2021          2022        2021

                                              (in thousands)               (in thousands)
Net Income, as reported (GAAP)          $    2,736       $   11,989    $    6,773   $  22,611
Net Income per Diluted Share (GAAP)     $     0.09       $     0.41    $   
 0.23   $    0.77

Gross Margin Items:
Antidumping Adjustments1                       896                -           719     (4,852)
Gross Margin Subtotal                          896                -           719     (4,852)

SG&A Items:
Accrual for Legal Matters and
Settlements2                                     -                -             -       5,672
Legal and Professional Fees3                     -              206             -         316
SG&A Subtotal                                    -              206             -       5,988

Other Expense (Income) Items:
Antidumping Adjustments Interest4               61                -           (1)     (1,360)
Other (Expense) Income Subtotal                 61                -        

(1) (1,360)

Adjusted Earnings                       $    3,693       $   12,195    $    7,491   $  22,387
Adjusted Earnings per Diluted Share
(a non-GAAP measure)                    $     0.13       $     0.41    $   

0.26 $0.76

1,2,3,4,5,6  See the Gross Profit, SG&A and Other Expense (Income) sections
above for more detailed explanations of these individual items. These items have
been tax affected at the Company's federal incremental rate, which was 26.4% for
the 2022 period and 26.1% for the 2021 period.

Seasonality


Our net sales fluctuate slightly as a result of seasonal factors, and we adjust
merchandise inventories in anticipation of those factors, causing variations in
our build of merchandise inventories. Generally, we experience
higher-than-average net sales in the spring and fall, when more home remodeling
activities are taking place, and lower-than-average net sales in the
winter months and during the hottest summer months. These seasonal fluctuations,
however, are minimized to some extent by our national presence, as markets
experience different seasonal characteristics. Those historical trends have been
and continue to be affected by supply chain constraints and the COVID-19
pandemic.

Liquidity, capital resources and cash flow


Our strong balance sheet and liquidity provide us with the financial flexibility
to fund our growth initiatives and position LL Flooring for long-term success.
Our principal sources of liquidity at June 30, 2022 were $5.0 million of cash
and cash equivalents on our balance sheet and $181.9 million of availability
under our Revolving Loan. As of June 30, 2022, there was a $15.0 million
outstanding balance on our Revolving Loan.

Our net cash flows used in operating activities were $76.0 million during the
six months ended June 30, 2022, which was primarily the result of purchases of
inventory ($106.0 million), redemption of customer deposits and store credits
($8.6 million), and payments for legal matters and settlements ($8.0 million),
partially offset by increased accounts payable ($25.0 million) and net income
($6.8 million).

Through the six months ended June 30, 2022, net cash flows used in investing
activities included $11.6 million in capital expenditures for store rebranding,
opening six new stores and investments in digital. For 2022 we currently expect
capital expenditure investments of $23 million to $25 million, including the
opening of 20 to 22 new stores and the continuation of the investing activities
described above.

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  Table of Contents

On April 30, 2021 we entered into a Second Amendment to the Credit Agreement to
extend the maturity date to April 30, 2026, convert the FILO Term Loan into the
Revolving Credit Facility, decrease the margin for LIBOR Rate Loans, and reduce
the LIBOR floor, which is described more fully in Item 1, Note 5 to the
condensed consolidated financial statements.

The Company continues to navigate uncertainty in the macroeconomic environment
related to inflation, consumer spending, global supply chain disruptions,
COVID-19, and a challenging labor market. As of June 30, 2022, we have rebuilt
inventory by more than $104 million after an extended period of supply chain
constraints. We believe that cash flows from operations, together with cash on
hand, and the liquidity under our Credit Agreement will be sufficient to meet
our obligations, fund our settlements, operations, anticipated capital
expenditures, and potential share repurchases for the next 12 months. We prepare
our forecasted cash flow and liquidity estimates based on assumptions that we
believe to be reasonable but are also inherently uncertain. Actual future cash
flows could differ from these estimates.

Merchandise inventories


Merchandise inventories at June 30, 2022 increased $104.4 million from
December 31, 2021 primarily due to increased purchases to replenish inventory as
well as, to a lesser extent, inflation. We consider merchandise inventories
either "available for sale" or "inbound in-transit," based on whether we have
physically received and inspected the products at an individual store location,
in our distribution centers or in another facility where we control and monitor
inspection.

Merchandise inventories and available inventory per store in operation were as
follows:

                                                     As of June 30,       As of December 31,       As of June 30,
                                                          2022                   2021                   2021

                                                                            (in thousands)
Inventory - Available for Sale                      $         314,124    $             197,927    $         190,916
Inventory - Inbound In-Transit                                 44,680                   56,458               32,991
Total Merchandise Inventories                       $         358,804    $             254,385    $         223,907

Available Inventory Per Store                       $             719    $                 467    $             459


Inventory available by store at June 30, 2022 was higher than December 31, 2021 and June 30, 2021 following the replenishment of our inventory levels.

Inbound inventory in transit typically varies due to the timing of certain international shipments and seasonal factors, including international holidays, rainy seasons, and the scheduling of specific commodity categories. Due to supply chain difficulties, international shipping times have increased.

Significant Accounting Policies and Estimates

Critical accounting policies are those that we believe are both significant and
that require us to make difficult, subjective, or complex judgments, often
because we need to estimate the effect of inherently uncertain matters. We base
our estimates and judgments on historical experiences and various other factors
that we believe to be appropriate under the circumstances. Actual results may
differ from these estimates, and we might obtain different estimates if we used
different assumptions or conditions. We have had no significant changes in our
Critical Accounting Policies and Estimates since our annual report on Form 10-K
for the year ended December 31, 2021.

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