LL FLOORING HOLDINGS, INC. Cautionary Note 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:
· an overall decline in the health of the economy, the hard-surface flooring
industry, the housing market and overall consumer spending, including the
effects of the COVID-19 pandemic;
· impact on sales, ability to obtain and distribute products, and employee safety
and retention, including the effects of the COVID-19 pandemic;
· obligations related to and impacts of new laws and regulations, including
pertaining to tariffs and exemptions;
· the outcomes of legal proceedings, and the related impact on liquidity;
· reputational harm;
· obtaining products from abroad, including the effects of COVID-19 and tariffs,
as well as the effects of antidumping and countervailing duties;
· obligations under various settlement agreements and other compliance matters;
· disruption due to cybersecurity threats, including any impacts from a network
security incident;
· inability to open new stores, find suitable locations for our new store
concept, and fund other capital expenditures;
· inability to execute on our key initiatives or such key initiatives do not
yield desired results;
· managing growth;
· transportation costs;
· damage to our assets;
· disruption in our ability to distribute our products, including due to
disruptions from the impacts of severe weather;
· operating stores in
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· managing third-party installers and product delivery companies;
· renewing store, warehouse, or other corporate leases;
· having sufficient suppliers;
· our, and our suppliers', compliance with complex and evolving rules,
regulations, and laws at the federal, state, and local level;
· disruption in our ability to obtain products from our suppliers;
· product liability claims;
· availability of suitable hardwood, including due to disruptions from the
impacts of severe weather;
· sufficient insurance coverage, including cybersecurity insurance;
· access to and costs of capital;
· the handling of confidential customer information, including the impacts from
the California Consumer Privacy Act;
· management information systems disruptions;
· alternative e-commerce offerings;
· our advertising and overall marketing strategy;
· anticipating consumer trends;
· competition;
· impact of changes in accounting guidance, including the implementation
guidelines and interpretations;
· maintenance of valuation allowances on deferred tax assets and the impacts
thereof;
· internal controls;
· stock price volatility; and
· anti-takeover provisions
Information regarding risks and uncertainties is contained in the Company's
reports filed with the
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 10K for the year endedDecember 31, 2019 .
Overview
Lumber Liquidators is one of the leading specialty retailers of hard-surface flooring inNorth America , offering a complete purchasing solution across an extensive assortment of domestic and exotic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile. We also feature the renewable flooring products bamboo and cork, and provide a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. We offer installation and delivery services through third-party independent contractors for customers who purchase our floors. AtMarch 31, 2020 , we sold our products through 420 stores in 47 states inthe United States and inCanada , a call center and websites. We believe we have achieved a reputation for offering great value, superior service, and a broad selection of high-quality flooring products. With a balance of price, selection, quality, availability and service, we believe our value proposition is the most complete within a highly fragmented hard-surface flooring market. The foundation for our value proposition is strengthened by our unique store model, the industry expertise of our people, our singular focus on hard-surface flooring, and our advertising reach and frequency. To supplement the financial measures prepared in accordance with GAAP, we use the following non-GAAP financial measures: (i) Adjusted SG&A, (ii) Adjusted SG&A as a percentage of sales, (iii) Adjusted Operating Income, (iv) Adjusted Operating Margin, (v) Adjusted Earnings and (vi) Adjusted Earnings per Diluted Share. The non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with 19
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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 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 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.
Impact of COVID-19 Pandemic on Our Business
The end of the first quarter of 2020 was marked by the impact of the COVID-19 pandemic but we remain focused on serving our customers while keeping the health and safety of employees paramount. Aligning with these priorities, we are executing a variety of flexible operating models that utilize safety measures such as personal protective equipment for employees and allow for contact-free engagement. We have also established a crisis team in reaction to the pandemic to identify and execute our business continuity plan in order to mitigate the impact while safely serving customers across our national footprint. StartingMarch 22, 2020 we closed as many as 56 stores for a period of time while all other stores operated under reduced hours and/or warehouse-only conditions, offering curbside pickup and job site delivery for our Pro and DIY customers. Our comparable store sales results were down from the prior year by approximately 45% in the last week of the month of March. As of the date of this report, in compliance with state and local regulatory orders, approximately 60% of our stores are fully operational, approximately 25% are scheduling appointments to allow customers to visit our showrooms, and approximately 15% are utilizing our warehouse-only model, while less than 10 stores remain closed.. In addition, we are leveraging strategic investments in digital capabilities made over the past 18 months, including the Floor Finder and Picture It! tools, to serve customers at LLFlooring.com. Web traffic has increased meaningfully in recent weeks, and adapting to the change in consumer behaviors, we have expanded availability of online flooring samples and are currently offering extended hours for voice and click-to-chat customer support, curbside store pickup and enhanced home-delivery options. As a result of reduced demand and the changes in the current operating model related to COVID-19, we made the difficult decision to temporarily furlough a number of store associates and reduce operating hours in our distribution centers in April. Subsequently we have recalled a number of these associates, and returned to normal operations in ourVirginia distribution center. Impacted employees received two weeks of pay and have the opportunity to utilize up to 80 hours of paid time off. In addition, we are currently paying the employee portion of benefit premiums for any employee impacted beyond four weeks. We have implemented a range of other measures to increase financial flexibility and maintain agility during this challenging time. These measures include reducing costs, managing inventory flow, deferring payments, and delaying or stopping non-critical projects, including a pause in the planned opening of certain new stores and reducing capital spending. We also implemented a temporary reduction in all salaried employee compensation including a 25% reduction in the base pay of the interim President, the Chief Financial Officer and certain other C-level executives, and a corresponding 30% reduction in the cash compensation of the Board of Directors. As ofMarch 31, 2020 , the Company had$39 million outstanding under its revolving credit facility and$25 million outstanding under its FILO Term Loan. Collectively, this is an$18 million decrease from the end of the fourth quarter 2019 while the cash and cash equivalents balance increased by$13 million . As ofMarch 31, 2020 , the Company had$131 million in liquidity, comprised of$22 million of cash and cash equivalents and$109 million of availability under the Credit Agreement.
On
· A temporary increase in the senior asset-based revolving credit facility from
Revolving Credit Facility from
borrowing base calculation
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· A temporary increased in advance rate against inventory under the borrowing
base
· Pricing permanently increased by 1.25% with respect to the margin rate on LIBOR
Rate loans, and permanently increased by 1.50% with respect to the margin rate
on the FILO Term Loan. Pricing on the unused commitment fee also permanently
increased by 0.25%.
Executive Summary
Results of operations for the three months ended March 31, 2020 as described
below are not necessarily indicative of future results to be expected for the
full year due to a number of factors, including seasonality and general economic
conditions that may impact sales for the remainder of fiscal 2020. Additionally,
we cannot predict the impact of the COVID-19 pandemic to our sales, supply
chain, and distribution as well as to overall construction, renovation and
consumer spending.
Net sales in the first quarter of 2020 increased $1.2 million , or 0.4%, to $267
million from the first quarter of 2019. Through the week ending March 21, 2020 ,
the Company's quarter-to-date comparable store sales increased approximately 4%,
but as the impact of COVID-19 began to broadly impact consumers, orders declined
significantly and first quarter comparable stores sales fell to negative 0.9% by
the end of the quarter. Partially offsetting the decline from COVID-19 was the
impact of one additional day, February 29 , in the first quarter of 2020. We
opened one new store in the first quarter of 2020 bringing total store count to
420 as of March 31, 2020 .
Gross profit increased 12% in the first quarter of 2020 to $105 million from $94
million in the comparable period in 2019. Gross margin increased to 39.3% in
the first quarter of 2020 from 35.2% in the first quarter of 2019 as margin
enhancement efforts, tariff exclusions and supply chain efficiency positively
impacted results. Gross margin was also aided by a mix of higher-margin
manufactured products and reduced discounting in stores.
SG&A expense decreased 0.9% to $96 million in the first quarter of 2020 from the
comparable period in 2019 but included certain costs in both periods related to
investigations and lawsuits. Excluding these items as shown in the table that
follows, Adjusted SG&A (a non-GAAP measure) was essentially flat to the same
period in the prior year and Adjusted SG&A as a percentage of sales decreased to
35.7% in the first quarter of 2020 from 35.8% in the first quarter of 2019. A
focus on expense management and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A as a percent of sales in the quarter.
Operating income was$8.8 million for the first quarter of 2020 compared to an operating loss of$3.4 million for the first quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was$9.6 million for the first quarter of 2020,
a
year-over-year increase of over$11 million compared to an Adjusted Operating Loss of$1.6 million for the first quarter of 2019. The most significant driver of the increase was the impact on gross margin for the reasons outlined above. Income tax benefit was$4.4 million for the first quarter of 2020 compared to income tax expense of$0.2 million for the first quarter of 2019. The benefit in 2020 was driven by the impact of theMarch 27, 2020 CARES Act which allowed us to carryback certain losses to prior periods and deduct certain capital expenditures from prior periods more quickly giving rise to a$4.9 million Federal tax refund which is expected to be received later this year. Net income for the first quarter of 2020 was$12 million , or$0.42 per diluted share, compared to a net loss of$4.9 million , or$0.17 per diluted share, for the first quarter of 2019. Adjusted Earnings and Adjusted Earnings per Diluted Share (non-GAAP measures) for the first quarter of 2020 increased$16 million and$0.57 year over year and were$13 million and$0.44 per diluted share, compared to an Adjusted Loss of$3.6 million and$0.13 per diluted share for the first quarter of 2019. 21 Table of Contents Results of Operations We believe the selected sales data, the percentage relationship between net sales and major categories in the condensed consolidated statements of operations and the percentage change in the dollar amounts of each of the items presented below are important in evaluating the performance of our business operations. % Increase (Decrease) % of Net Sales in Dollar Amounts Three Months Ended March 31, 2020 2020 2019 vs. 2019 Net Sales Net Merchandise Sales 89.3 % 89.4 % 0.4 % Net Services Sales 10.7 % 10.6 % 1.0 % Total Net Sales 100.0 % 100.0 % 0.4 % Gross Profit 39.3 % 35.2 % 12.1 % Selling, General, and Administrative Expenses 36.0 % 36.5 % (0.9) % Operating Income (Loss) 3.3 % (1.3) % NM Other Expense 0.3 % 0.5 % (31.6) % Income (Loss)/ Before Income Taxes 2.9 % (1.8) % NM Income Tax (Benefit) Expense (1.6) % 0.1 % NM Net Income (Loss) 4.6 % (1.9) % NM SELECTED SALES DATA Average Sale1$ 1,355 $ 1,303 4.0 % Average Retail Price per Unit Sold2 2.5 % (1.9) % Comparable Store Sales (Decrease) Increase (%) (0.9) %
(0.8) %
Number of Stores Open, end of period 420
413
Number of Stores Opened in Period, net 1
-
Number of Stores Relocated in Period3 1
-
Comparable Stores4 (% change to prior year): Customers Invoiced5 (4.9) % (1.0) % Net Sales of Stores Operating for 13 to 36 months 4.6 % 2.5 %Net Sales of Stores Operating for more than 36 months (1.2) %
(0.9) %
Net Sales in Markets with all Stores Comparable (no cannibalization) (0.5) %
0.0 %
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1 Average sale is defined as the average invoiced sales order, measured
quarterly, excluding returns as well as transactions under
generally sample orders or add-on/accessories to existing orders).
2 Average retail price per unit (square feet for flooring and other units of
measures for moldings and accessories) sold is calculated on a total company
basis and excludes non-merchandise revenue.
3 A relocated store remains a comparable store as long as it is relocated within
the primary trade area.
4 A store is generally considered comparable on the first day of the thirteenth
full calendar month after opening.
5 Change in number of customers invoiced is calculated by applying the average
sale, described above, to total net sales at comparable stores.
NM Not meaningful.
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Net Sales
Net sales in the first quarter of 2020 increased $1.2 million , or 0.4%, to $267
million from the first quarter of 2019 driven by an increase in merchandise
sales. By major category, manufactured products grew from 41% of sales in the
first quarter of 2019 to 44% of sales in the first quarter of 2020, mostly
offset by a decline in solid and engineered hardwood products. The vinyl
sub-category within manufactured products continues to drive growth due to its
outstanding aesthetics, high resilience and waterproof characteristics. Net
services sales (install and freight) were flat to the prior year in part due to
an outsized COVID-19 impact on in-home installations. Through the week ending
March 21, 2020 , the Company's quarter-to-date comparable store sales grew by
approximately 4%, but as the impact of COVID-19 began to broadly impact
consumers, orders declined significantly and first quarter comparable stores
sales fell to negative 0.9% by the end of the quarter. Partially offsetting the
decline from COVID-19 was the impact of an additional day, February 29 , in the
first quarter of 2020. We opened one new store in the first quarter of 2020
bringing total store count to 420 as of March 31, 2020 .
Gross Profit
Gross profit expanded 12% in the first quarter of 2020 to$105 million from$94 million in the comparable period in 2019. Gross margin increased to 39.3% in the first quarter of 2020 from 35.2% in the first quarter of 2019 as margin enhancement efforts, tariff exclusions and supply chain efficiency positively impacted results. Gross margin was also aided by a mix of higher-margin manufactured products and reduced discounting in stores. Tariffs played a significant role in year-over-year comparisons. Beginning inSeptember 2018 , goods coming fromChina received an additional 10% tariff. Beginning inJune 2019 , the tariffs increased to 25%. In order to mitigate the impact of tariffs, we reduced discounting in the stores, implemented merchandising cost-out efforts and enacted retail price increases. OnNovember 7, 2019 , the United States Trade Representative ("USTR") ruled on a request made by certain interested parties, including the Company, and retroactively excluded certain flooring products imported fromChina from the Section 301 tariffs. The granted exclusion applies retroactively from the date the tariffs were originally implemented onSeptember 24, 2018 throughAugust 7, 2020 . The Company recorded a$27 million receivable related to these tariffs during the fourth quarter of 2019 in the caption "Tariff Recovery Receivable" on the Consolidated Balance Sheets and expects to receive payments by the end of 2020.
Selling, General and Administrative Expenses
SG&A expense decreased 0.9% to$96 million in the first quarter of 2020 from the comparable period in 2019 but included certain costs in both periods related to investigations and lawsuits. Excluding these items as shown in the table that follows, Adjusted SG&A as a percentage of sales (a non-GAAP measure) decreased from 35.8% in the first quarter of 2019 to 35.7% in the first quarter of 2020. The Company's focus on expense management and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A as a percent of sales in the quarter. Payroll-related costs as a percentage of sales were 15.8% in the first quarter of 2020 compared to 14.8% in the first quarter of 2019, and this increase was driven by increased medical claims, base pay due to merit increases and severance costs payable to our former CEO. SG&A expense was impacted by increased costs related to seven net new stores compared to the first quarter a year ago and medical expenses mostly offset by a decline in legal fees and travel. 23 Table of Contents 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 March 31, 2020 2019 $ % of Sales $ % of Sales (in thousands) SG&A, as reported (GAAP)$ 96,207 36.0 %$ 97,032 36.4 % Accrual for Legal Matters and Settlements 1 - - % (175) (0.1) % Legal and Professional Fees 2 793 0.3 % 1,978 0.7 % Sub-Total Items above 793 0.3 % 1,803 0.6 % Adjusted SG&A (a non-GAAP measure)$ 95,414 35.7 % $
95,229 35.8 %
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1 This amount represents the charge to earnings in 2019 for certain Related
Laminate Matters, which is described more fully in Note 7 to the condensed
consolidated financial statements.
2 Represents charges to earnings related to our defense of certain significant
legal actions during the period. This does not include all legal costs we
incurred.
Operating Income (Loss) and Operating Margin
Operating income was$8.8 million for the first quarter of 2020 compared to an operating loss of$3.4 million for the first quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was$9.6 million for the first quarter of 2020, a year-over-year increase of over$11 million compared to an adjusted operating loss$1.6 million for the first quarter of 2019. The most significant driver of the increase was the impact of higher gross margin rate as described above. 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 March 31, 2020 2019 $ % of Sales $ % of Sales (in thousands) Operating Income (Loss), as reported (GAAP)$ 8,765 3.3 % $
(3,421) (1.3) %
SG&A Items: Accrual for Legal Matters and Settlements 1 - - % (175) (0.1) % Legal and Professional Fees 2 793 0.3 % 1,978 0.7 % SG&A Subtotal 793 0.3 % 1,803 0.6 % Adjusted Operating Income (Loss)/Margin (a non-GAAP measure)$ 9,558 3.6 % $
(1,618) (0.7) %
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1,2 See the SG&A section above for more detailed explanations of these individual items.
Other Expense We had other expense of$0.9 million and$1.3 million in the three months endedMarch 31, 2020 and 2019, respectively. The decrease in expense in 2020 primarily reflected lower average borrowings on our Revolving Loan during the three months endedMarch 31, 2020 and a lower effective interest rate. 24 Table of Contents 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. Due to the current disruption in the economy related to the COVID-19 pandemic and the impact this has on making a reliable estimate of the annual effective tax rate as of the current reporting period, the Company has applied the actual year-to-date effective tax rate for the current period tax provision. The CARES Act (the "Act") was enacted onMarch 27, 2020 . The Act retroactively changed the eligibility of certain assets for expense treatment in the year placed in service, back to 2018, and permitted any net operating loss for the tax years 2018, 2019 and 2020 to be carried back for five years. The Company recorded an income tax benefit of$4.7 million in the first quarter associated with the income tax components contained in the Act. As ofMarch 31, 2020 , the Company has completed an initial analysis of the tax effects of the Act but continues to monitor developments by federal and state rulemaking authorities regarding implementation of the Act. The Company has made reasonable estimates of the effects of the Act and will adjust, if necessary, as new laws or guidance becomes available For the three months endedMarch 31, 2020 , the Company recognized an income tax benefit of$4.4 million , which represented an effective tax rate of (55.2)%. For the three months endedMarch 31, 2019 , the Company recognized income tax expense of$0.2 million , which represented an effective tax rate of (4.5)%. The income tax benefit for the three months endedMarch 31, 2020 included the impact of the enactment of the Act, as discussed above. The Company has a full valuation allowance recorded against its net deferred tax assets of$27 million . The Company intends to maintain a valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance could result in a significant decrease in income tax expense in the period that the release is recorded. However, the exact timing and amount of any reduction in the Company's valuation allowance are unknown at this time and will be subject to the earnings level it achieves in future periods.
Diluted Earnings per Share
Net income for the first quarter of 2020 was$12 million , or$0.42 per diluted share, compared to a net loss of$4.9 million , or$0.17 per diluted share, for the first quarter of 2019. Adjusted Earnings and Adjusted EPS (non-GAAP measures) for the first quarter of 2020 were$13 million and$0.44 per diluted share, compared to an adjusted loss of$3.6 million and$0.13 per diluted share, for the first quarter of 2019. 25 Table of Contents 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 March 31, 2020 2019 (in thousands) Net Income (Loss), as reported (GAAP) $ 12,235 $
(4,924)
Net Income (Loss) per Diluted Share (GAAP) $ 0.42 $
(0.17)
SG&A Items: Accrual for Legal Matters and Settlements 1 -
(129)
Legal and Professional Fees 2 586 1,461 SG&A Subtotal 586 1,332 Adjusted Earnings (Loss) $ 12,821$ (3,592) Adjusted Earnings (Loss) per Diluted Share (a non-GAAP measure) $ 0.44 $
(0.13)
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1,2 See the SG&A section above for more detailed explanations of these individual items. These items have been tax affected at the Company's federal statutory rate of 26.1%.
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.
Liquidity and Capital Resources
Our near-term focus is on liquidity as we are experiencing a major disruption to the normal course of our business due to COVID-19. Our principal sources of liquidity atMarch 31, 2020 were cash from our ongoing operations,$22 million of cash and cash equivalents on our balance sheet and$109 million of availability under our Revolving Loan. AsMarch 31, 2020 , the outstanding balance on the FILO Term Loan was$25 million and it carried an interest rate of 3.25%. As ofMarch 31, 2020 , the outstanding balance on the Revolving Loan was$39 million and it carried an average interest rate of 2.18%. We have implemented a range of measures to increase financial flexibility and maintain agility during this challenging time. These measures include reducing costs, managing inventory flow, deferring payments, and delaying or stopping non-critical projects including a pause in the planned opening of certain new stores and reducing capital spending. We also implemented a temporary reduction in all salaried employee compensation including a 25% reduction in the base pay of the interim President, the Chief Financial Officer and certain other C-level executives, and a corresponding 30% reduction in the cash compensation of the Board of Directors. Additionally, to provide more liquidity, onApril 17, 2020 , we entered into a First Amendment to the Credit Agreement to add incremental borrowing capacity of up to$37.5 million throughAugust 2020 , and increased the margin rate which is described more fully in Note 5 to the condensed consolidated financial statements. ThroughMarch 31, 2020 , we had$4.5 million in capital expenditures including opening 1 new store. As part of our response to COVID-19, we are implementing a range of measures to increase financial flexibility including delaying or stopping non-critical projects such as pausing the planned opening of certain new stores and reducing capital spending. We expect to reduce capital expenditures by approximately 50% from our original 2020 plan. 26 Table of Contents Although COVID-19 has created uncertainty regarding general economic conditions, and significantly impacted our sales, supply chain and stores, we continue to transact business and generate cash daily. We believe that cash flows from operations, together with the liquidity under our Credit Agreement as amended, will be sufficient to meet our obligations, fund our settlements, operations and anticipated capital expenditures 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 atMarch 31, 2020 decreased$17 million fromDecember 31, 2019 primarily due to focused initiatives in selling unproductive inventory; in addition to delays in shipments of inventory produced inAsia , as a direct result of the outbreak of COVID-19. We consider merchandise inventories either "available for sale" or "inbound in-transit," based on whether we have physically received and inspected the products at an individual store location, in our distribution centers or in another facility where we control and monitor inspection. Merchandise inventories and available inventory per store in operation were as follows: As of As of As of March 31, 2020 December 31, 2019 March 31, 2019 (in thousands) Inventory - Available for Sale$ 243,398 $ 254,812$ 273,877 Inventory - Inbound In-Transit 26,238 31,557 26,009 Total Merchandise Inventories$ 269,636 $
286,369
Available Inventory Per Store $ 580 $ 608 $ 663 Available inventory per store atMarch 31, 2020 was lower than atDecember 31, 2019 and significantly lower thanMarch 31, 2019 . The decrease in available inventory compared toMarch 31, 2019 was due in large part to lower average cost of inventory driven by tariff exclusions granted in the fourth quarter of 2019, improved country-of-origin sourcing, and cost-out negotiations across all categories. Including the currently expected effects of COVID-19, we anticipate average inventory to be in the range of$280 million to$305 million through the remainder of the year. Inbound in-transit inventory generally varies due to the timing of certain international shipments and certain seasonal factors, including international holidays, rainy seasons, and specific merchandise category planning. During the first quarter of 2020 we experienced a decrease in inbound in-transit due to the impact of COVID-19. Cash Flows Operating Activities. Net cash provided by operating activities was$36 million for the three months endedMarch 31, 2020 and was primarily due to a$16 million reduction in inventory, net income of$12 million in the quarter, and a$9.1 million increase in payables. Net cash provided by operating activities was$6.5 million for the three months endedMarch 31, 2019 and was primarily due to an$18 million reduction in inventory and a$7.3 million increase in customer deposits offset by a reduction in accounts payable of$17 million . Investing Activities. Net cash used in investing activities was$4.2 million and$3.2 million for the three months endedMarch 31, 2020 and 2019, respectively. Net cash used in investing activities in both three-month periods were primarily related to new store openings and our information technology initiatives. Financing Activities. Net cash used in financing activities was$18 million for the three months endedMarch 31, 2020 and was primarily due to net repayments on our Credit Agreement. Net cash provided by financing activities was$1.3 million for the three months endedMarch 31, 2019 and was primarily due to net borrowings on our revolving credit facility. 27
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Critical 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 10K for the year endedDecember 31, 2019 .
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