Lumber Liquidators Holdings, Inc. (NYSE:LL) Q2 2021 Earnings Conference Call August 4, 2021 8:00 AM ET
Julie MacMedan - Head, IR
Charles Tyson - President, CEO & Director
Nancy Walsh - SVP & CFO
Conference Call Participants
Laura Champine - Loop Capital Markets
Seth Basham - Wedbush Securities
Brian Nagel - Oppenheimer
Good morning. My name is Aman, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lumber Liquidators Second Quarter 2021 Conference Call. [Operator Instructions].
Thank you. Ms. Julie MacMedan, Head of Investor Relations, you may now begin your conference.
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 U.S. 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 at LL Flooring. Although LL Flooring 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 LL Flooring's 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.
In addition, during today's call, we will be discussing our financial performance on both a 1 and 2-year basis, given that the second quarter of last year was severely impacted by COVID-19 closures. 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 LL Flooring undertakes no obligation to update any information discussed in this call.
Now I am pleased to introduce President and CEO, Charles Tyson. Charles?
Thank you, Julie. Good morning, everyone. On today's call, I will review our strong second quarter results, which reflect the continued progress we're making on our four strategic pillars. People and culture, improving the customer experience, driving traffic and transactions and improving profitability.
I'd like to thank all our associates for doing a tremendous job navigating a dynamic supply chain environment to deliver outstanding customer service and impressive second quarter financial results.
We delivered strong second quarter sales and profitability growth, with comp sales up 31.3% versus last year and up 10% on a 2-year stack basis. Our strong comp growth was driven both by increasing traction on our transformation initiatives as well as the reopening of the economy compared to the COVID-19 shutdown in effect for much of the second quarter of last year. We believe our second quarter sales could have been higher, if not for the global supply chain disruptions that are having widespread impact.
Second quarter operating margin of 5.5% was up 290 basis points versus the second quarter of last year and up 600 basis points on a 2-year basis, underscoring the great work and execution of our merchants and sourcing teams to mitigate higher tariff, materials and transportation costs and the organization's disciplined expense management. On an adjusted basis, operating margin of 5.6% increased 280 and 440 basis points respectively, versus the second quarter of '20 and 2019.
We were pleased to report diluted EPS of $0.41, which was up $0.32 versus 2020 and up $0.51 versus 2019. Adjusted earnings per diluted share of $0.41 was up $0.31 versus 2020 and up $0.38 versus 2019. Nancy will go into more details on the financial results during our remarks, including what we have done to strengthen our balance sheet and pay down all of our debt.
Taking a closer look at what drove our second fourth quarter sales. We were pleased with the increasing traction we are seeing from our investments in improving the customer experience. These investments helped to grow our sales with Pros, in-store and DIY customers.
First, Pros. Growing our business with Pro is a key component of our long-term growth strategy. We primarily work with flooring focused products such as remodelers, property managers, installers, builders and Pros working in public spaces. We were very pleased to report that our Pro comp sales growth during the quarter exceeded total company comp sales growth on both a 1 and 2-year basis. We attribute the performance in Pro sales growth to a combination of execution on our strategic pillar of improving the customer experience as well as achieving more balanced growth across each of the types of Pro customers we serve due to the reopened economy.
We continue to build on the foundational program we launched in the third quarter of 2020 to create stronger relationships with Pros and better understanding their business, so we can provide better service and support them as a true partner. This relationship approach has been consistently reinforced with our field and is beginning to drive meaningful results.
We were pleased with the results we are seeing from our dedicated outside Pro account rep pilot, and we're continuing to monitor this program throughout 2021. Building on that, in early June, we reconfigured our national account rep program so that our inside sales reps are now better aligned geographically with the field are now focused on building relationships with our pros and driving incremental growth.
In March 2021, we introduced everyday competitive pricing for Pros, and we allow Pros to extend that pricing to their customers for a referral program. This pricing and referral program is delivered by our dedicated web experience we launched for Pros in April of 2021. The online experience also gives Pros access to real-time inventory levels and nearby stores. We've received very positive feedback on these 2 new important value drivers for Pros, and we're continuing to build awareness for these services. We plan to continue to enhance the Pro web experience with additional services in the months ahead. We believe the combination of how we align and focus our sales organization to better serve the Pro, combined with introducing new valuable services dedicated to the Pro will help us build richer and deeper relationships and grow our business with these important customers.
In addition to our success with Pros, our second quarter results were driven by 107% increase in net services sales, which are largely comprised of installation sales. The increase in installation sales versus last year primarily reflects consumers' comfort with having professionals into their homes compared to the severe shutdown due to COVID-19 in the second quarter of last year. On a 2-year basis, net service sales were up 10%, demonstrating the benefit from our investments in improving the installation customer experience. We believe offering our customers a complete solution from inspiration to installation is a core competitive advantage for us. We offer delivery and in-home installation services through select third-party installers for customers who purchase out Pro.
We plan to grow our installation sales by attracting new customers and automating much of the installation experience to improve both the customer experience and increase store productivity. This automation started in the second quarter of 2020, when we launched an independent installer portal. Using this tool, our installation partners can better manage schedules, financials, estimates and other workflow items. This management tool has helped many of our installers successfully grow their business well beyond their original expectations.
Building on that, in December 2020, we rolled out an in-store portal to enhance visibility to our customer installation projects, increase efficiency for our store associates and reduced turnaround time for our customers when quoting new jobs. We plan to continue to add capabilities to the in-store portal to make it as seamless, fast and easy as possible to conduct installation business with us.
We also grew sales for DIY customers in the second quarter versus last year. Our strategy to grow business with DIY customers is to deliver convenient, superior and high-touch guided shopping experience. That's both affordable and accessible. Buying flooring is a complex transaction. We provide an end-to-end solution that starts with helping customers select the floor itself for the underlayment and matching accessories and finally for installation services to complete a project.
Transformation initiatives supporting our DIY growth strategy, include improving the customer experience and driving traffic and transactions. More specifically, generating demand with a brand that represents quality, a guided experience in a trend right assortment, making it easier for retail customers to do business with us through engaging digital tools and educational online content and creating a more convenient and engaging in-store customer experience.
In May, we launched our new Floor Love brand campaign, which repositions the LL Flooring brand to highlight our expertise and high-quality trend right assortment. The campaign reinforces our dedication to guiding customers through the entire flooring journey with the tagline from inspiration to installation, get the floors you love only at LL Flooring.
In July, we began the broad scale rebranding of our stores, which we expect to be largely completed by the end of 2021. Our new rebranded store format includes both new store experience and interior signage that creates an appealing environment, which better showcases the quality of our products and the expertise of our people. We also further enhanced our on trend design product portfolio with the launch of new, innovative wide width and water resistant flooring.
During the second quarter, vinyl plank and solid hardwoods were again at top-performing categories. We now offer more than 500 flooring SKUs that customers can easily discover through our e-commerce site, including a completely virtual online experience or in our stores.
Our digital experience is an important part of bringing more customers into the flooring journey. During the second quarter, our web sales were down 32% versus the second quarter of last year when COVID shutdowns were at that peak, but were up over 140% on a 2-year stack basis. Customers were very engaged with our picture it and floor finder tools, which make it easy to imagine how the floor will look in their homes. We plan to continue to enhance our digital experience and drive traffic to our e-commerce sites and stores to effective digital marketing.
We're also making it more convenient to shop with us by expanding our store footprint. During the second quarter, we opened 4 new stores, bringing our total store count to 416 at the end of June. In addition to opening traditional stores, we are further enhancing customer convenience and reinforcing our LL Flooring brand proposition by piloting a test of showroom only locations. We have 3 locations scheduled to open during the second half of 2021 in convenient and attractive retail corridors, and we look forward to sharing more on these pilots on future calls. Including the 3 showroom on locations, we are on track to open 12 to 15 new stores in 2021.
Turning to our people and culture initiatives, building a strong company culture is critically important and provides the foundation for all that we do for our customers. We've embraced diversity, equity and inclusion as a core value, and we're building a scalable program to ensure that these values permeate throughout the organization, including our recently completed diversity, equity and inclusion workshops.
We're also investing in attracting and retaining talent. We're creating an attractive professional development in career path for our associates in order to establish LL Flooring as an employer of choice. This includes new learning and development programs that are helping our associates deliver both an outstanding customer experience as well as develop leadership skills that can take them to the next level within the company.
At the end of June, we launched a new program to increase our investment in our field team, including increasing store staffing levels and raising wages. We believe all of these actions are critical components of our goal of building a high-performing company culture that attracts and retains top talent and reinforces our value.
As we look ahead, we're encouraged by the traction we are gaining under each of our strategic pillars. People and culture, improving the customer experience, driving traffic and transactions and improving profitability. We believe these pillars will enable us to win with customers and drive sustainable long-term growth.
From a consumer demand perspective, we remain encouraged by potential multiyear tailwinds supportive of consumer spending on hard surface flooring. Traditionally, existing home sales have been an important driver of flooring projects. In June, the inventory of existing home sales for sale was $1.25 million, representing a 2.6 month supply, which was a slight improvement from May. We are monitoring tight housing inventory and affordability on continued existing home sales.
That said, the new more flexible work environment post COVID-19 may motivate more consumers to remodel their existing homes, if they cannot move. So we are also monitoring the positive work-from-home impact on flooring remodeling projects. In addition, we're monitoring the potential impact of a shift in consumer spending patterns in the second half of 2021. Since May, the U.S. has seen consumers shift spending from durable goods to services as they prioritize leisure activities over home improvement projects.
In addition, inflationary pressure could cause consumers to postpone big-ticket projects until affordability improves.
Finally, recently, the Delta variant of CODIV-19 has caused an increase in cases in the U.S. and abroad, and we're monitoring the potential impact of this on suppliers as well as consumer demand and their willingness to have contractors in their homes.
Turning now to the supply chain. During the second quarter, we believe we could have captured more sales if our inventories have been higher. Our supply chain teams continue to do a great job bringing in new inventory and allocating it effectively across our stores to help our customers complete their flooring projects.
In addition, consistent with our strategy of being a leader in delivering a trend right assortment, we currently offer over 500 SKUs, and we'll continue to introduce new and innovative products sourced from across the world to help satisfy demand. We believe our high level of service, collection and expertise is a key competitive advantage that allows us to win with customers in this challenging supply chain environment.
We expect the supply chain to remain constrained for this foreseeable future, potentially continuing to limit inventory availability and increased materials and transportation costs. From an international perspective, some of our sourcing partners across Southeast Asia have experienced temporary shutdowns due to COVID-19 outbreak, which limited production and delayed international shipping.
We also continue to navigate general limited international container availability and higher container costs. Domestically, we do not expect the solid domestic hardwood supply to normalize until 2022 at the earliest. We also continue to see availability constraints on domestic trucking, which is impacting our transportation costs.
We will look to continue to mitigate higher materials and transportation costs through pricing and promotional strategies, while monitoring the market to inform and guide our decisions. We will also continue to execute disciplined expense management, increasing efficiency and productivity while investing in our strategic growth pillars.
In summary, we demonstrated strong sales and profitability improvement in the second quarter on both a 1 and 2-year basis, underscoring the traction we're gaining on our transformation initiatives. We're particularly pleased with Pro sales growth outpacing our overall growth, and we look forward to building on this momentum. While the near-term operating environment poses challenges, we believe our transformation strategies will position us well for the long term.
I want to thank all of our associates for their energy and dedication in delivering an outstanding experience for our customers.
I will now turn the call over to Nancy to share the financial details of the quarter. Nancy?
Thanks, Charles. Good morning, everyone. In the second quarter, net sales of $301.4 million increased $71.1 million or 30.9% versus the second quarter of 2020 due to a 23.6% increase in net merchandise sales and 106.8% increase in net service sales. We saw a 29.4% increase in our average ticket, reflecting a greater mix of installation sales as well as higher merchandise average ticket and a 2% increase in transaction count compared to the same period in 2020. When comparing to the second quarter of 2019, net sales increased 4.4%, driven by 3.5% higher merchandise sales and 10.4% higher net service sales. Average ticket improved 11.3% and transactions were down 1.3%.
As Charles noted, second quarter 2021 comparable-store sales increased 31.3% versus the second quarter of 2020 and 10% on a 2-year stacked basis. We achieved these strong results despite continued supply chain constraints. We feel good about the underlying demand for our flooring based on our customer deposits, and our teams are doing a great job managing customer expectations and inventory across our network to fulfill customer orders.
Turning now to gross profit. Gross profit increased 27.7% in the second quarter of 2021 to $112.7 million from $88.3 million in the comparable period of 2020, and increased 10% from $102.5 million in the second quarter of 2019. The gross margin of 37.4% in the second quarter of 2021 compared to 38.3% in the second quarter of 2020 and 35.5% in the second quarter of 2019. The 90 basis point decrease in gross margin versus last year primarily reflects higher tariffs on certain goods imported from China and higher materials and inbound transportation costs, which were partially offset by pricing, promotion and sourcing strategies.
The second quarter of 2021 and 2020 had no non-GAAP adjustments to gross margin. During the second quarter of 2019, gross margin included a $780,000 favorable adjustment for HTS duty categorization in prior periods. When excluding that adjustment, gross margin was 35.2% for the second quarter of 2019. The 220 basis point improvement in the second quarter of 2021 adjusted gross margin versus 2019 is particularly impressive given that the cost of merchandise sold on certain products imported from China, included 25% tariff rates in the second quarter of 2021 compared to only 10% in the second quarter of 2019.
Turning now to SG&A. SG&A expense for the second quarter was $96.1 million or 31.9% of sales, leveraging 380 basis points compared to $82.3 million or 35.7% of sales in the second quarter of 2020. SG&A expense for the second quarter of 2019 was $103.9 million or 36% of sales. SG&A in each quarter included certain costs related to legal matters and settlements. When excluding these items from all periods, adjusted SG&A expense for the second quarter of 2021 was $95.8 million compared to $81.8 million in 2020 and $98.1 million in 2019.
The higher adjusted SG&A expense in 2021 compared to 2020 reflected substantial adjustments made last year to address the COVID-19 pandemic. When compared to 2019, the lower SG&A expense reflected more efficient marketing spend and disciplined expense management under the company's profit improvement initiative. Even with the rigorous cost controls, we continue to invest in our growth initiatives that fuel our top line performance.
As a percentage of sales, adjusted SG&A of 31.8% improved 370 basis points from 35.5% of sales in the second quarter of 2020 and improved 220 basis points from 34% of sales in the second quarter of 2019. The for the second quarter of 2021, we delivered operating income of $16.6 million, an increase of $10.6 million compared to $6 million in the second quarter of 2020 and an operating loss of $1.4 million in the second quarter of 2019.
Adjusted operating income in the second quarter of 2021 was $16.9 million, up $10.4 million from $6.5 million for the prior year period and up $13.3 million from 2019. Adjusted operating margin for the second quarter of 2021 was 5.6%, up 280 basis points from 2.8% in the second quarter of 2020 and up 440 basis points from 1.2% in 2019. The higher operating income and margin reflect good progress on our profit improvement initiatives with our merchant and sourcing teams implementing strategies to mitigate tariffs and higher transportation material costs.
Our marketing teams deploy more efficient and effective marketing spend and our overall organization driving disciplined expense management.
In the second quarter of 2021, we reported other expenses of $498,000 compared to other expense of $1.1 million for the 3 months ended June 30, 2020. The decrease of $600,000 was driven by lower interest and fees on our credit agreement due to the amendment in April 2021 and the paying down of our outstanding debt during the second quarter of 2021.
In the second quarter of 2021, we recognized income tax expense of $4.1 million or an effective tax rate of 25.6% compared to income tax expense of $2.2 million or an effective tax rate of 45.7% for the second quarter of 2020. The variability of our tax rate in 2020 reflects the impact of the Cares Act last year.
For the second quarter of 2021, net income increased by $9.4 million to $12 million compared to net income of $2.6 million for the second quarter of 2020. We reported a net loss of $2.9 million in 2019. Adjusted earnings for the second quarter of 2021 were $12.2 million compared to adjusted earnings of $3 million for the second quarter of 2020 and $820,000 in 2019.
Finally, earnings per diluted share were $0.41 for the quarter versus earnings per diluted share of $0.09 in the year ago quarter and a loss of $0.10 in 2019. On an adjusted basis, second quarter earnings per diluted share of $0.41 compared to adjusted earnings of $0.10 for the second quarter of 2020 and adjusted earnings of $0.03 in 2019.
Turning to the balance sheet. Inventory at the end of the second quarter was $224 million compared to $225 million at the end of March 2021 and $249 million at the end of June 2020. The 10% year-over-year reduction in inventory was primarily driven by supply chain constraints on replenishment and strong sales that kept inventory below our targeted level.
Our balance sheet and liquidity are strong. We ended the quarter with cash and cash equivalents of $112 million compared to $170 million as of December 2020. During the second quarter, we repaid all $101 million of our outstanding credit facility debt, consistent with the plans we shared on our last call.
Net cash provided by operating activities was $53 million for the 6 months ended June 30, 2021, primarily due to positive changes in working capital, reflecting continued inventory supply constraints as well as $23 million of net income. We continue to work toward rebuilding our inventory to optimal levels. As we are able to do so, we would expect that to have an unfavorable impact on working capital and cash provided by operating activities.
As of June 30, 2021, we had $241 million of liquidity comprised of $112 million of cash and cash equivalents and $129 million of excess availability under the credit agreement. This represents an increase in liquidity of $55 million from June 30, 2020.
Turning now to the remainder of 2021. In the face of a dynamic operating environment, our team remains dedicated to our transformation, driving growth and improving profitability. I would like to expand on some of the details that Charles touched on at a high level. We are pleased with the traction we are gaining on our transformation initiatives. That said, given the combination of increasingly challenging supply chain constraints on inventory replenishment, potential consumer demand shifts and the potential impact of the COVID-19 delta variant, we believe it is prudent to plan for slowing comparable sales on a 2-year stacked basis for the second half of 2021 compared to the 10%, we delivered in the second quarter.
We remain concerned that higher transportation material costs will persist in the second half, and we look to offset higher costs through pricing and promotion strategies while monitoring the market to inform and guide our decisions. As we saw in the second quarter, 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 enter their homes. This will benefit gross margin dollars but lower the gross margin rate.
With respect to SG&A during the second half of 2021, we would expect adjusted SG&A spending to increase as a percent of sales compared to the second quarter. This is due primarily to the increasing investments in our field organization that Charles discussed as well as continued investment in our strategic initiatives to support our growth over the long term.
We still expect CapEx investments of approximately $24 million to $28 million in 2021, primarily for the broad scale rebranding of our stores, the opening of 12 to 15 new stores and investments in digital. During the second quarter, we opened 4 new stores. In April, we opened our Exton, Pennsylvania store. In May, we opened a new store in Medford, New York. And in June, we opened new stores in Hattiesburg, Mississippi and Beckley, West Virginia. The new stores have the LL Flooring branding, and we are excited about the opportunity to drive additional sales and profitability growth through these new locations.
In summary, we delivered strong sales growth and profitability in the second quarter on both a 1 and 2-year basis, demonstrating solid progress on our transformation initiatives. Our entire organization remains focused on driving growth and profitability in 2021. And our strong balance sheet and liquidity provide us with the financial flexibility to fund our strategic growth initiatives and position LL Flooring for long-term success.
Thank you all for your time this morning. With that, I'll ask the moderator to open the call to questions.
[Operator Instructions]. Our first question today comes from Laura Champine from Loop Capital Markets.
You mentioned that the increasing penetration of installation negatively impacts gross margin, which is not a surprise. But can you tell us how much that increase in installation impacted gross margin in Q2 and give us sort of a sense of the shape of the impact as we move through the year?
We have not shared specific details around that. What I will tell you, though, is that the mix of our merchandise more than offsets the installation increase for us. So as a factor within the gross margin and had a very minor impact in terms of the installation sales.
Okay. Should we expect the same in near-term future quarters?
It would be consistent. We are expecting installation sales to return to pre-COVID levels. And we do, as you saw in the queue, our mix between hardwood and vinyl, that's really driving the increase for us in terms of the mix. So I would expect that to continue going forward.
Our next question today comes from Seth Bashman from Wedbush Securities.
Could you just focus on the transaction trends that you're seeing? It seems like relative to 2019 transactions were down in the second quarter. And I presume that is due to some limitations around supply chain. So as you think about that going forward, would you expect transactions to begin to improve versus 2019 in the back half of the year? And any other color around that would be helpful.
I'll start with 2020 first that we did see that 29% increase in ticket and a 2% increase in transaction. When we look at 2019, the ticket is up about 11% in our transactions, we're down 1.3%. And we do believe that the lower than optimal inventory is impacting our transaction. But based on the strength of our customer deposits, we feel really good about the underlying demand for our products.
So your customer deposits were flattish in the second quarter relative to the first, you haven't been able to work those down any more quickly. As you look forward, would you expect your customer deposits to come in by the end of the third quarter? How are you thinking about that?
The timing Seth, as you would expect, what the supply chain situation looks like now is really uncertain. But we're really pleased with what our teams have been doing to get inventory in and to continue to settle our customer deposits. And we feel the strength of that. And if you look at the Q, you see the amount coming in as well as the amount that we're settling, fairly consistent, keeping that balance pretty flat. So we also believe that repositioning the brand, LL Flooring that we're attracting customers who value our expert service and our quality trend assortment, and all of that is adding to that we feel good about the fact that overall, we're going to continue to see inventory starting to improve as time goes on and settling those customer orders, but we're in a good position right now.
Are you seeing a higher rate of cancellations of orders because of delays in being able to complete them?
No, absolutely not, Seth. No, we're not seeing that at all. This is Charles.
Okay. And then lastly, just thinking about that demand versus supply picture for the back half of the year, you're wanting some headwinds to the demand environment, including as shift services spending, inflation and also the COVID variant. As you're thinking about those drivers, which are the biggest ones that you think will limit your sales growth in the back half and drive comps to be lower than 10% 2-year basis?
Yes. Look, I think that's a great question, and I think everybody is asking themselves that question. I think the issue is that there's just a lot of volatility, right? And nobody really knows where COVID is going to land in terms of impact to consumers as we go into the full. We're going to watch all of those drivers in terms of potential headwinds as we continue to invest in our growth initiatives that drove our outcomes in Q2. So while we're being cautious on the road ahead in terms of those headwinds that you mentioned, we're also being positive in terms of the investments that we've made in our initiatives earlier in the year and how we see the positive impact of those initiatives flowing through. And we clearly highlighted the positive benefit we're seeing from our Pro team, who's really doing good work in the field, very happy with the execution from our field operators around our Pro value proposition.
[Operator Instructions]. Our next question comes from Brian Nagel from Oppenheimer.
A couple of questions. So we wanted to ask you to discuss more about the logistics environment today, about your expectations for the duration of constraints to remain for the foreseeable future? And how we should think about your rebuilding of inventory in light of this for the latter part of the year?
Yes. Look, that's a great question. I think we were lucky that our teams did a great job and lucky our teams did a great job of going into the market on the international freight side and really doing a lot of good work in terms of forecasting around by country and region. I - as you can read in all publications, expect this supply chain constraint from a container availability perspective and a cost environment to continue in the near future. And I don't know if that continues into 2022. But it is constrained from a container perspective, and it is constraining from a cost environment perspective outside of core contracts. But that doesn't prevent us from really accelerating how we think about expanding our assortments, as we said on the call, we now have 500 SKUs that allows for a lot of ability for our teams to substitute between product categories. And we're also leveraging greater areas around the globe for a new product, and we'll continue to innovate and introduce new products as we go through Q3 and Q4, and we feel very good about strategic partnerships with vendors that are bringing in those new products.
So it is a constrained environment, but our teams are doing great work in terms of how we think about alternative country sourcing to be able to offset where some of those headwinds may arise going into the future.
In terms of inventory, we plan to continue to build our inventories as we move through the year to return to more normal levels. We're just being cautious just based on some of the unknowns in terms of specific impact that COVID could have, particularly, as you saw, a month or so ago, major distribution out of Asia, particularly in the Hong Kong area where freight didn't move for a few days because of COVID shutdowns in the port, and none of us can control that.
So we just highlighted that as a potential headwind for the industry as we move through COVID through the rest of this year.
Okay. And a good segue to my next question, which is with respect to tariffs. And you talked about tariffs impacting gross margin earlier. How - and actually, again, I recognize that you're not going to give official guidance to the back of the year. But how should we think about like the impact of tariffs, both through the balance of fiscal one and over time as COVID-19 disruptions abate.
Yes. So I think a couple of things, I would say that, one, the 25% tariffs came back on in August of 2020. So over the time of the inventory, we will be fully anniversarying now as we move through Q3 and Q4. Second, as you can see from our Q, our amount of product that we are purchasing from China where the tariffs has come down pretty dramatically. And so our merchant teams are doing really good work on 2 fronts: one, alternative country sourcing, which we've talked about a lot in the past. But second, we're spending a lot of time on product development and innovation. We believe that, that new product positioning will also help us offset some of that margin headwind that's flowing through. And third, we talked probably 9 months ago about how we've initiated a pricing practice. We now have very sophisticated pricing tools that's helping us be a lot more focused and targeted in both everyday pricing and promotional pricing to allow us to mix our business appropriately. And finally, through all of this, we've also managed to launch everyday Pro pricing, which we haven't said is going to have a headwind on our margin structure and has really helped us augment our pro value proposition.
So while clearly, there's a volatile environment, whether it's on raw material tariffs, the teams are doing just a fantastic job on looking at how to innovate, how to use the new tools that we put in capability to manage through in the gross margin environment.
[Operator Instructions]. There are no further questions at this time. So I'll hand back to Mr. Tyson. I'll hand the call back over to you.
Thank you, operator. Thanks, everyone, for joining us today. I want to reiterate our excitement around that the progress we're making on our transformation initiatives, and that's going to position us well for the long-term success of our company. Our teams are intently focused on executing our growth strategies to drive sales and profitability in the second half of 2021. Wishing everyone good health and safety, and we look forward to updating you on our performance next quarter. Thank you.
This concludes today's conference call. You may now disconnect.