Key excerpts from Lumber Liquidators Q3 2010 earnings report are provided in this post.
Three important points before we dive into the data:
First, substitute ERP for SAP in every instance—this is a cross-platform problem.
Two, applaud Lumber Liquidators for manning up to their problems, not pointing fingers (at least publicly), and moving ahead to fix their troublesome investment.
And three, please note that no one blames the system—it’s Lumber Liquidators inability to use the system that impacted Q3 revenue and profitability.
Enough said, here’s the headline of the Press Release—yikes!
Lumber Liquidators Announces Third Quarter 2010 Financial Results
~ SAP System Implementation Impacts Third Quarter Results
This is the first line of the earnings release:
Lumber Liquidators (NYSE: LL), the largest specialty retailer of hardwood flooring in the U.S., today announced financial results for the third quarter and nine months ended September 30, 2010.
Standard stuff, but here’s what immediately follows:
SAP System Implementation
On August 22, 2010, Lumber Liquidators implemented the most significant phase of its integrated business solution from SAP, including an enhanced point-of-sale solution, a warehouse management and inventory control system, an integrated merchandising and product allocation system, and related management reporting functionality.
All critical information was converted from the previous information system and the Company has continued to operate its business without interruption since the conversion.
Here’s the bad news:
However, the implementation significantly impacted third quarter 2010 results by reducing productivity, primarily across store and warehouse operations, including less effective conversion of customer demand into invoiced sales, less efficient product allocation and distribution, and the general need for additional resources to operate the business.
Let’s get specific:
The Company estimates that reduced productivity resulted in approximately $12 million to $14 million in unrealized net sales during the third quarter.
SG&A expenses for the third quarter of 2010 reflect one-time costs of approximately $0.5 million related to the SAP implementation, primarily resulting from increased payroll and warehousing costs.
The Company estimates that reduced productivity subsequent to the system implementation increased inventory carrying levels by approximately $8.0 million.
That’s $20 - $25 million in additional cost, largely because people were not prepared to use their new ERP system!
Jeffrey W. Griffiths, Lumber Liquidators' President and Chief Executive Officer, commented, "While we are confident that over the longer-term the implementation of our new SAP system will significantly benefit the business, our performance in the third quarter reflects declines in productivity both at the store-level and in the flow of product through our warehouse following implementation."
“Overall, we remain focused on improving our operations and building a foundation for long-term success."
Sincere accolades to Lumber Liquidators' executives for doing the right thing after the fact—admitting the hit and committing to long-term success. If you’ve ever shopped at a Lumber Liquidators you know they’re a quality outfit.
I don’t know what Lumber Liquidators spent to prepare their people for ERP or (more important) how they prepared their people for ERP.
But it was clearly not enough.
