Dive Brief:
- LL Flooring is pursuing a potential sale-leaseback deal for its Sandston, Virginia, distribution center as it seeks additional liquidity, according to its quarterly financial report released last week.
- The 1-million-square-foot facility near Richmond, Virginia, is the flooring retailer's East Coast distribution hub, serving 265 stores and processing 2 million units daily, according to a listing of the facility by commercial real estate company JLL.
- The facility had a net book value of $39.6 million as of March 31, which "is significantly lower than its prospective market value," per the quarterly report. Proceeds from the sale-leaseback transaction would fund the company's operations and help it stay in compliance with a bank credit agreement that has been funding its working capital needs.
Dive Insight:
A sale-leaseback deal for LL Flooring's major supply chain asset — its two other primary distribution facilities are leased — would provide additional liquidity for the company amid a poor stretch of financial results.
LL Flooring's Q1 net sales fell 21.7% year over year as weaker existing home sales, heightened interest rates and inflationary pressures have tamped down demand.
"These challenging macro factors have pushed home improvement spend per housing unit below its 50-year average, impacting the remodel industry," President and CEO Charles Tyson said on a Q1 earnings call last week. "The leading indicators continue to predict that spending on remodel activity will remain challenged through 2024."
The company's credit agreement is secured by collateral that includes the Virginia distribution center. However, the company can release that facility from the collateral "under certain conditions" that weren't specified in the report.
Without the sale, LL Flooring doesn't expect its projected liquidity levels to be sufficient enough to maintain compliance with the credit agreement in Q4 of 2024. That would complicate LL Flooring's future, as it would raise doubt about its ability to continue as a going concern for at least a year, per the quarterly filing.
LL Flooring announced its plans to build the distribution center in 2013, which aimed to boost its efficiency and product availability at stores. The company had been relying on leased space across four separate buildings in Virginia to serve its East Coast operations prior to its opening.
LL Flooring isn't the only company to pursue sale-leaseback deals involving its supply chain assets. Earlier this year, health and wellness business The Beachbody Company, Inc., sold a production facility in Van Nuys, California, for $6.2 million before entering into a five-year lease, according to its Q1 financial report. It used the sale proceeds to make a payment of $5.5 million on a loan.
