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Operator
Ladies and gentlemen good morning and welcome to LESCO's Fourth Quarter and Year-End 2005 Conference Call and web cast.
[OPERATOR INSTRUCTIONS]
Portions of the presentation and other statements relating to sales and earnings, expectations, new service center openings and profitability, the company's ability to impose price increases, and other statements that are not historical information are forward-looking statements.
Investors are cautioned that forward-looking statements involve risks and uncertainties, and that actual results may differ materially from such statements. Investors should not place undue reliance on such statements.
Factors that may cause actual results to differ materially from those projected or implied in the forward-looking statements are set forth in the company's Securities & Exchange Commission Reports, including, but not limited to, Form 10-K for the year ended December 31, 2004.
In addition some of the information that will be discussed today may include non-GAAP financial measures. Presentation of the most directly comparable GAAP measure and a reconciliation of the differences between the non-GAAP financial measure and the comparable GAAP measure are described herein and are included in the company's press release which is available on the LESCO web site at www.lesco.com
I will now turn the conference over to Jeff Rutherford, President and Chief Executive Officer. Please go ahead sir.
Jeffrey Rutherford - CEO, President
Thank you operator and thanks to all of you for joining us this morning. With me today are Bruce Thorn, our Chief Operating Officer and Mike Weisbarth, our Chief Financial Officer, as well as other key members of our senior management team.
Today we would like to accomplish the following. I will provide an overview of our business and discuss the progress on our strategic initiatives. Mike will give a financial review of our fourth quarter 2005 results and provide guidance for 2006. Then I will offer some concluding comments before we proceed to Q&A.
In 2005 net sales for the year were up 2.6% to $576 million with the Store segment net sales increasing 10.4% to $500 million.
Total company gross profits increased to $141 million which was 24.6% of net sales. Excluding the inventory mark-downs related to the company's decision to outsource parts distribution and rationalize its product offering, this margin was 25.6% of net sales.
The most significant accomplishment of the year is the culmination of our strategic and financial realignment. Over the past four years we have been engaged in an ongoing restructuring effort to streamline our business model and focus on the more profitable side of our business. This past quarter, with the completion of the sale of substantially all of our supply-chain assets, the Turf Care Supply Corporation, we have exited the low-margin, high-working and fixed-capital intensive, manufacturing business in order to invest further in our more profitable Store segment.
This transaction has allowed us harvest the working capital and will allow us to realize the tax benefits of our supply chain so that we can devote our resources to the area we hold a clear and differentiated, competitive advantage.
While we are quite confident in the direction we are taking the company, it is important to note that 2006 will be a year of transition as the company works to execute effectively following the TCS transaction.
Our service centers and Stores-on-Wheels are unique in the industry. We combine the easy access of a multiple location distributor with the competitive prices and the most educated and knowledgeable sales staff in the industry.
We firmly believe that our concentration on further developing the Store segment will drive sales growth and improved operating margins going forward. Sales in our service centers have been strong and we have experienced particularly nice top-line growth at our new stores.
Total Store segment sales were up 18.5% in the fourth quarter and service center same store sales were up 10.4%.
Since 2003 when we started moving in the direction of further developing and growing our stores model, we have added 79 stores to our service center network and in 2005, with a total of 305 units.
The class of 2003 stores delivered a 32% revenue gain for the quarter and the class of 2004 generated a solid 50% growth in sales versus a year ago.
New stores are slower to open -- were slower to open in 2005 than originally anticipated which translated into an average of only 1,900 unit-weeks, per store, open in 2005 compared to 36 unit-weeks in 2004 and 35 in 2003.
Due to the delayed opening, approximately half of the new 2005 stores will operate as first-year stores in 2006. We intend to be back on a new store opening schedule similar to 2003 and 2004. We plan to ramp 2006 openings earlier in the year than we did in 2005, while monitoring potential cannibalization of existing area stores.
Expansion will focus on a market in which we have already established a store presence. Our industry analysis shows that there is potential for LESCO to open at least 250 new service centers over the next five years and we anticipate opening up to 40 in 2006.
In addition to our service centers we are going to continue to drive profitability through our significantly expanded fleet of Stores-on-Wheels. In 2005 we increased the number of Stores-on-Wheels to 111 vehicles from 73. While we incurred significant challenges with such a fast ramp, and endured employee turnover associated with the changes we implemented, we expect that in 2006 the majority of Stores-on-Wheels will be more efficient as they cover condensed territories.
Additionally, with the downsizing to a box truck from a tractor trailer, it should be more cost effective to operate, which is important with higher fuel prices.
The smaller Stores-on-Wheels will not only call on golf courses, but will visit all locations with stationary turf superintendent functions including schools, universities, cemeteries, parks and municipalities.
Store expansion and sales growth do come at a price and we have experienced some operating profit contraction during this period. For example, we increased field management in order to create the infrastructure to support future store growth and we extended merchant discounts as market conditions necessitated more aggressive promotional offerings to gain market share and maintain customer loyalty.
Sales at new stores take time to ramp up. We believe there is significant opportunity for expanding gross profit per square foot along with overall operating profit improvement as the stores begin to mature.
Typically new service centers operate at a loss for the first year, break even in year two and are profitable by year three. We hope to hasten the time to profitability through the implementation of better merchandising to marketing programs along with enhanced efficiency in our store operations.
As we discussed last quarter we hired a number of new members to the management team with significant multiple-store model experience. And we are applying their expertise to our stores. Our focus is on the Store segment, we will continue to look to improve our Direct sales opportunities.
Due to our shift in strategy net sales in the Direct segment declined during the fourth quarter and full year. Nevertheless, we have a number of customers that we will continue service on a direct-shipment basis as they also purchase through the Store segment in either a service center or Stores-on-Wheels or both.
We are culminating the reset of our operating model and we are now eagerly focused on its execution. Moreover, we have the right team in place to get us there, this includes our strong leadership team as well as our field employees who are the face of our company and skillfully serve our customers on a daily basis.
I believe we are now well positioned to achieve meaningful growth and improving returns over time.
With that I will turn the call over to Mike.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Thank you Jeff and good morning everybody. Hopefully you've already had the opportunity to go through the details of our fourth quarter and full-year 2005 results that were in our press release this morning.
I will first review some of the highlights and incremental charges that impacted the results then I will wrap up my comments with a discussion on our expectations for 2006.
For the fourth quarter of 2005 the company's consolidated results on a GAAP basis were a loss of $15.6 million or $1.74 per diluted share compared to a net loss of $13 million or $1.49 per diluted share last year. Included in these results were a number of incremental charges particularly related to the company's restructuring and supply chain sale.
The incremental charges reduced fourth quarter 2005 earnings by approximately $1.10 per diluted share compared to charges that reduced 2004 results by $0.81. Included in the fourth quarter of 2005 operating results were costs of $4.7 million or $0.53 per share related to our supply chain transaction. This includes $2.2 million for costs related to the closing of four distributions hubs that were not purchased by Turf Care Supply Corp. or TCS as you'll hear us refer to it.
Last quarter we informed you that we anticipated recording an additional $4 million in costs related to this transaction. The incremental $700,000 of expenses relative to our previous guidance was primarily due to estimated costs incurred for the future resolution of certain EPA requirements on lands sold in Martins [Ferry] Ohio.
Additional fourth quarter charges unrelated to the transaction include $2.5 million or $0.28 per diluted share for the mark-down charges to restructure our parts sourcing model and further rationalize our product offering. The necessary mark-downs were actually $1.5 million less than what we had expected.
Additionally, the company incurred expenses of $2.6 million or $0.29 per diluted share associated with a stock-option buy out and severance costs for prior executives. The severance costs were in line with the guidance we provided in last quarter's earnings release. And the additional charge is related to stock-option repurchase which presented itself as part of our stock and equivalents buy-back program during the fourth quarter, and allowed us to retire over 336,000 options that had exercise periods extending up to six years from now.
Included in the fourth quarter 2004 operating results were $1.9 million of expenses related to our corporate head quarter relocation that we did in the fall of 2004. And $5.2 million in charges associated with the [Sequire] contract termination. And then there was $100,000 reduction in our estimated accrual for hurricane and flood-related costs from activity that occurred in the fall of 2004.
Additionally, the company maintains a full valuation allowance for its net deferred tax assets and net operating loss carry-forwards. And therefore has no reported tax provision or benefit, net of the valuation allowance adjustments.
So if we can assume a 30% tax rate, which we believe is a more consistent way to evaluate our year-over-year performance, and we exclude all of the items I just mentioned, the company would have reported a fourth quarter 2005 loss of $0.39 per diluted share compared to an adjusted loss of $0.42 per diluted share in 2004.
Now I'm going to move on and discuss our segment results. Our Store segment includes both service centers and Stores-on-Wheels along with field management costs.
Our Direct segment result is composed of non-store transactions including national accounts and other customers not purchasing through the stores. Store segment net sales increased 18.4% in the fourth quarter of '05 to $116 million from $98 million for the comparable period a year ago.
Service center sales increased 16.2% and Stores-on-Wheels jumped 29% with the year-over-year expansion of our fleet. Comparable service center sales were up 10.4% for the quarter. Gross profit as a percentage of net sales increased 140 basis points, 25.8%, due to improved margins in the majority of our product categories with the most significant lift coming in seed, control products and fertilizer.
Store segment selling expense increased $5.5 million on a comparative quarter-over-quarter basis. With the addition of 31 new service centers and 38 new Stores-on-Wheels during the year, along with expanding our field management team to support future growth we incurred incremental selling expense of $3.1 million. This investment resulted in a short-term deleveraging impact which we expect will dissipate as our store base matures.
The majority of the residual increase is due to higher incentive compensations for our field personnel along with the timing of certain training and selling support costs.
Merchant discount expense increased 80 basis points for the three months on a year-over-year basis due to the change in customer credit mix. We offer customers three ways to pay, cash or check, bank credit and our private-label credits applied through GE. To better serve our customers we have expanded our acceptance of bank credit cards and more customers have been paying us that way. However, for us bank credit is the most expensive option, so as the customer usage mix has shifted, merchant discount expenses increased.
In our direct sale segment net sales were $13 million for the fourth quarter versus $27 million during the comparable period last year. The change is attributable to the company's decision to restructure and redeploy our direct sales associates. Gross profit as a percentage of sales increased 360 basis points to 19.4% from 15.8% in the same period in 2004.
Gross profit had a positive trend through the course of the year. Our sale of our supply chain assets has allowed us to focus on profitability rather than sales volume as we no longer need to chase unprofitable business in order to sell through excess capacity and blending facilities.
As part of the new reporting structure the two operating segments are supplemented by corporate costs. As this is a new format presenting our operating results, I'd like to take a minute to explain what is included in corporate costs. Corporate costs are incurred for selling support functions such as customer service, bids processing, product registration and marketing expense. In addition merchant discounts that are incurred for the extension of customer payment terms, general and administrative expense, and new service center pre-opening expenses are all reported as corporate costs.
In 2005 corporate costs also included a number of the incremental expense items including charges incurred for the supply chain transaction with TCS, mark-down costs related to the further rationalization of our product offering and the outsourcing of our parts distribution business, severance expense and the cost I mentioned previously for the buy-back of stock options.
In 2004 the corporate costs include charges related to the company's relocation of the headquarters and expenses pertaining to a contract termination with one of our previous suppliers, along with costs incurred for hurricane and flood damage in 2004.
In essence all of the '05 and '04 charges are reflected in corporate support expense. Within corporate expenses for the fourth quarter, general and administrative costs increased to $8.3 million or 6.4% of net sales. But remember this includes $2.6 million of charges, when you exclude the charges we experienced a $1.4 million quarter-over-quarter improvement that is attributable to the reduction in bonus compensation for corporate management and the payroll and related costs that were eliminated because of the transition of a number of employees to TCS as part of the supply chain sale.
Also included in corporate costs are merchant discounts which are predominantly the promotional extension of terms of our private label credit programs.
In the fourth quarter of 2005 corporate merchant discounts was $4.1 million versus $2.4 million last year due to greater customer participation in our extended-term offering and a more competitive promotional environment.
Pre-opening expense was $500,000 during the fourth quarter in 2005 versus $200,000 in 2004.
Now, turning to our balance sheet for a moment, as of December 31, 2005 our cash and cash equivalents was $21 million versus $8.1 million at the same time last year. We had no debt this year compared to total debt of $7.3 million at the end of '04. Our balance sheet keeps getting healthier, and with the recent infusion of cash from the supply chain transaction we are well positioned with the flexibility necessary to further invest in the growth of our stores.
As Jeff previously mentioned, 2005 was an extremely important inflection year for the company. As part of the transition we incurred a number of costs to reset the model and reported tax-adjusted net income of $0.45 per diluted share compared to $0.55 per diluted share of net income in 2004. So that excludes all of the charges I previously reviewed and that implies a 39% tax rate.
Nevertheless, throughout the streamlining of our business we were still able to maintain top line expansion with net sales up 2.6% in 2005 on top of the 7.3% advance in 2004. Our business model is now reset and in 2006 we are poised to execute our strategy and return to profitability.
Now I would like to make a few comments about our guidance for 2006. Since our restructuring and decision to concentrate on our higher profit Store segment we think it's important to look at the performance of the two segments separately. Therefore, for 2006 we are going to provide you with a detailed range of expectations by each of our operating segments, but not on a specific EPS target by segment, nor on a consolidated basis.
We believe that the significant change in our operating model, including the effects of the TCS transaction, warrants this level of detail however, don't get too used to this as we don't expect to provide this, such granularity in the future years.
For the Store segment we anticipate net revenue growth between 10 and 12% including the opening of up to 40 new service centers our gross profit rate of 25.6 to 25.9%, and selling expense at approximately 16% of net sales. We also anticipate merchant discount expense between 1.5 and 1.7% of net sales.
For the Direct segment we anticipate net revenue declining 14 to 15% with a gross profit improvement to 16% as we continue to rationalize our direct business. We anticipate that selling expense will deleverage on a year-over-year basis to 7.6% of net sales and merchant discounts will improve to 2% of net sales.
In the corporate support area we expect a 6 to 9% improvement in overall expenses. With corporate selling expense at 1.6% of consolidated sales and corporate merchant discount expense at .7% of consolidated sales.
We are modeling general and administrative expense at 22 to $23 million and pre-opening expense at about $2.5 million. And currently we don't expect any net interest expense for the year.
At this point in time I will turn the call back over to Jeff for some concluding thoughts.
Jeffrey Rutherford - CEO, President
Thank you Mike. Before we turn the call over to Q&A I want to make some brief concluding remarks.
We are optimistic about the upcoming year. Over the past few months we have spent a significant amount of time interacting with our 900 team members in the field who are the heart of this business, and many of our customers.
I am now even more convinced that this is a strong model and that together we will expand our market share throughout the country, over time. We are optimistic about the outlook for the professional lawn care and landscaping industry. Spending is expected to grow in the high single-digits over the next several years, due in part to the aging of the baby boomer generation, the high number of two-income families and continued time constraints on consumers in general.
LESCO is well positioned to capitalize on this growth due to our brand awareness which is the most recognized in the professional turf care industry combined with our national distribution platform and network of expert sales professionals in our stores.
To that end LESCO continues to gain market share in the consumables portion of the professional lawn and landscape industry as we exceed the industry-average growth rate of 4%.
In addition we remain committed to our golf customers through both our Stores-on-Wheels and service centers and no one has as broad a distribution as we do to serve-bound.
We are certainly poised and ready for the selling season and we expect comparable service center sales growth will be sustainable based on everything we have discussed with you today.
As the stores mature and we achieve greater operating leverage this anticipated sales growth should translate into steadily improving returns and enhanced shareholder value.
With that we will turn the call over to questions.
Operator
Thank you sir.
[OPERATOR INSTRUCTIONS]
And sir, our first question is from the line of James [Bank] with Sidoti.
James Bank - Analyst
Hello Jeff, hello Mike. How are you guys. Just a couple of questions, I noticed in your press release that you referenced improved gross margin due to better pest control and seed. Which I thought typically, actually, had pretty poor margins and I was just wondering if you might be able to elaborate on that, possibly the success that you had with those product lines?
Jeffrey Rutherford - CEO, President
Well James, what we have is it's a little bit of a mix issue too. The improvement is based upon, and we don't want to get into too much as far as competitive information, but we put in a new pricing model. We've refined our product mix, we have a little bit of change in mix within our product categories, were concentrated on higher return. We've talked about one of the key metrics for us going forward is gross margin return on inventory.
And so we are -- we will continue to refine our product offering and also our ability to raise margins through our pricing matrix. But we're not going to get into any more details than that relative to our competitive pricing.
James Bank - Analyst
Okay, fair enough. The other question again, about margins. Just seeing that you've for the most part completed this transition period and going forward I just wanted to ask, and then understanding that this was the fourth quarter specific, probably, are these profit margins somewhat normalized now? And kind of going forward we might be able to use this as a basis?
Jeffrey Rutherford - CEO, President
Well we gave a little more detailed guidance than we would normally give on gross profit because of the TCS transaction. And there is going to be somewhat of a flip on the geography of our income statement from cost -- to start with in our G&A cost they're going to [become part of their cost basis]. And then they will charge us a cost based upon the contract with them and obviously they have a profit motive to be in business also.
So there's going to be a little bit of mix difference, that's why we gave as much detail as we did relative to gross profit guidance.
James Bank - Analyst
Okay, yes, I definitely appreciate that given the transition that's going on, but it looks good. The only -- the last question I have is just kind of specific. I remember you, even in the press release, I noticed with the supply chain asset sale you expected to ultimately net $25 million in cash and it seems like your cash did go up in the fourth quarter. But I quickly flipped through and I might have missed it, and I apologize if I did, but I just was wondering what amount of cash actually came from that sale, that might have padded your balance sheet, just in the fourth quarter, if you're able to give out that information?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
No, I don't think we're going to give out that information.
James Bank - Analyst
Okay, well thank you very much guys. And that's it, thank you.
Operator
And sir, our next question is from the line of Greg Mckinley, with Dougherty.
Gregory Mckinley - Analyst
Good morning, wonder if I could get a little more clarification on your guidance. I sort of backed into some implied dollar amounts in each of these divisions and I think if -- I just want to go through some of the facts there.
It looks to me like you're looking for sort of a mid-$40 million operating income number in the Store segment, maybe a low to mid-single million dollar operating income in the Direct segment. I think those are sort of numbers that I feel comfortable with backing into on your guidance.
But when you talk about corporate support costs, how should I think of those, your guidance around SG&A merchant discounts, selling expense and pre-opening is all very clear, but the company also counted some improvement of 6 to 9%. I'm just trying to get into some dollar terms here and I'm not sure what that 6 to 9% is an improvement off of, can you help me there?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
That was just on a pure base of 2005 excluding some of those -- the charges, or the incremental items that we reviewed.
Gregory Mckinley - Analyst
Okay, so in total then, what would your guidance imply for total corporate support costs, what kind of range are we talking about?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Well we've given each of the components --.
Gregory Mckinley - Analyst
So those four components are everything?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
That is everything for corporate support costs.
Gregory Mckinley - Analyst
Okay, so if I add that up and I'm in the general $40 million range, is that -- am I -- I'm not missing something?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Well there's a range there Greg that you'll get to and I don't think we're going to give any more detailed guidance but that. But if you take -- and what you need to get to is this guidance is based off of the pro forma information so you have to go to -- if you have to take our charges and back them out.
Gregory Mckinley - Analyst
Yes.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
And start with the pro forma base and then apply this guidance on top of that.
Gregory Mckinley - Analyst
Okay. Can I just ask, why are you -- with as much that's going on at the company, the last thing I want to do is sort of misinterpret, you've done a great job providing granularity, but can you give us any comfort that I'm not misinterpreting that. That I've sort of gotten the right operating income goals and the general expense structure that is implied in this guidance.
Jeffrey Rutherford - CEO, President
What we'll do is we'll be consistent with this guidance. And if you want to give us a call to talk about the guidance, we'll give it, but we're not going to give any more detail than we've already given.
Gregory Mckinley - Analyst
Okay, I know that in the Storage segment it looks like you're looking for a declining gross margin year-over-year, percentage?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Yes, it's going to decline, gross profit will decline and there's a couple of reasons for that. As I said earlier, that we're going to move some G&A out of our historical G&A expense.
Gregory Mckinley - Analyst
Right, okay.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
And that we're going to offset that over on TCS and then they're going to charge us back what their margin on top of the product.
Gregory Mckinley - Analyst
Fair enough.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
So there's going to be some decline in gross profit percentage at the segment level, in particular in the Store segment level. But then there's going to be some benefit elsewhere in the income statement.
Gregory Mckinley - Analyst
Okay, that makes sense. And then that's what's showing up in your G&A guidance basically, in the corporate segment, is pushing some of those costs back up into margin.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
That's right.
Gregory Mckinley - Analyst
Okay, and then in your net revenue growth for the Storage, of 10 to 12%, it looks like you're planning on growing square footage about maybe low teen's percent, so is that implying we know new stores come in at lower sales productivity rates, is that implying sort of a low single-digit comp in '06?
Jeffrey Rutherford - CEO, President
Yes.
Gregory Mckinley - Analyst
Right in that general range.
Jeffrey Rutherford - CEO, President
Yes.
Gregory Mckinley - Analyst
Okay, thank you guys.
Operator
And sir, our next question is from the line of Paul Resnik with Dutton Associates.
Paul Resnik - Analyst
Good morning.
Jeffrey Rutherford - CEO, President
Good morning, Paul.
Paul Resnik - Analyst
I have to improve my speed-reading skills here, but in looking over the materials I notice -- and I think this might link up to what you've already said about where you're putting expenses. In looking at your new service center operating-model assumption, the revenue ramp up is a little higher than the assumptions that you were making a couple of years ago, when I first started following the company.
On the other hand, after the first couple of years, looking out further, the four-wall EBIT is a little -- somewhat less, and so again, is this a reflective of just putting more of the expense into this part of the report?
Jeffrey Rutherford - CEO, President
Yes, Paul, the way we use to report segments and the way -- when we had manufacturing, where there were certain fixed costs that weren't charged back to the operating segments, in particular it was warehousing costs. And warehousing costs were reported through our manufacturing segment and were treated as a fixed cost. Now that we've sold that segment, and it's gone the -- basically those costs for us become bearable costs and we've put them back into the operating segments.
So we've adjusted both in the segment-reporting side of the business and in historically, and with the new-store model for certain costs that used to be outside the model, are now in the operating model. So we -- in essence we've simplified our modeling and that we now only have stores and in the direct business and then corporate costs. We don't have any other non-allocated costs in there. So what the net effect of that is it adjusts an individual store, but doesn't adjust the entire model.
Paul Resnik - Analyst
Okay. With regard to your share repurchasing program, so far the only indication that anything's been done there is the option purchase. Have you commenced buying stock in the open market, do you -- and --? In looking at your cash balance of $21 million clearly $25 million is not available for share repurchase, do you have any sense of how much cash is going to be available for share repurchase in 2006?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
We announced what we had already purchased through yearend. There is an active program out there and it's in a 75/1 program. We will continue to monitor that program during open periods and adjust it accordingly, but we haven't changed the guidance we've already given relative to the stock repurchase program. It's still the number of shares that were previously authorized by our Board.
Paul Resnik - Analyst
Very good.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
The 1.5 million.
Paul Resnik - Analyst
1.5 million, okay. And lastly, again, given the reconfiguration of the firm, there's really no expectation for a change in -- any flattening in the seasonality of -- certainly not of revenues, but of earnings per share, the --. What you're doing is not likely to lead to lower losses in the off periods and flatten things out, or is there some aspect to the shift here that might change, in some way, seasonality?
Jeffrey Rutherford - CEO, President
No, it's not going to change operating results from a seasonal perspective, it may change cash flow and inventory investment a little bit, and the effect of hopefully seeing improvement in working capital so. To the extent -- but it's not going to be in operations that would be on the balance sheet and possibly in interest.
Paul Resnik - Analyst
Good. Thank you very much.
Jeffrey Rutherford - CEO, President
All right Paul.
Operator
And sir, our next question is from the line of Frank Byrd with Hawkshaw Capital Management.
Frank Byrd - Analyst
Good morning. Just two quick questions, one, would you be willing to provide some more detail on the terms of your 10-5B1 plan, I know you guys didn't file on that?
And then secondly, when you transitioned the golf business, middle of last year, were some of your Store-on-Wheels, some of the new ones, not put in service, maybe sitting dark in parking lots. If so would you just give me an update in terms of how many were out of service on Q2, Q3 and then just recently? Thanks.
Jeffrey Rutherford - CEO, President
Yes, we're not going to comment on our 10B-51, what we will do is every time we have a conference call we'll talk about what we've done in the stock repurchase.
As far as the golf, Stores-On-Wheels and that transition, I think we've been fairly transparent in that it didn't go certainly as we would like. And there were times -- I don't know Frank, the number of stores and when they were out of service, but that did happen. We did have stores that were parked, we did have people -- we did have turnover in people and we did have new people come on to those trucks.
Golf, is a very relationship business and we will continue to see a ramp in Store-on-Wheels performance as that fleet that, in particular the 38 incremental, stores mature.
We have stated in the release what we believe the effect of the decision to expand the fleet and to convert the tractor trailers to the smaller truck and the turnover in incremental management group that we had to add because of that expansion. And I think the number was approximately $3.6 million of negative effect to our operations in 2005.
Frank Byrd - Analyst
But just to be clear, you guys dramatically increased the number of Stores-on-Wheels in the middle of the year. Is it fair to say that you could have had a reasonably large number of those sitting dark in parking lots, not productive? And then could you just clarify if all 111, or very close to that, are actively in service now?
Jeffrey Rutherford - CEO, President
They're all up today. We can say that. Yes, I don't have, as I said, I don't have the numbers in front of me, but you're right. The disruption, the turnover, the expansion, it was disruptive to our operations in 2005. And the best I could say is that we really believe the effect of that cost is $3.6 million last year.
Frank Byrd - Analyst
Very good, thank you.
Jeffrey Rutherford - CEO, President
Sure.
Operator
And sir, our next question is from the line of Joe [Suderlich] with Schneider Capital Management.
Joe Suderlich - Analyst
Hello guys, how are you doing today.
Jeffrey Rutherford - CEO, President
Hello Joe.
Joe Suderlich - Analyst
Quick question for you about G&A. If we looked, if we applied the '05 methodology to '06, looking at this $27 million number here, can we --. I guess going forward for '06 is G&A going to be flat based on that, is it going to go down, is it going to increase?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
This is Mike, as we had stated earlier we're looking for about a 22 to $23 million range on G&A in '06. In '05 we said there was some shift, $1.5 million of our G&A that shifted out. There is obviously some more coming because of the transition to TCS. So '05 is not 100% pure yet and that's why we're saying, giving you the range of where we expect '06 to be.
Joe Suderlich - Analyst
I'm just still looking at this -- what seems to be a 5 to $6 million reduction, and it isn't because it's getting pushed back into the Store segment. But I guess it's -- if I were to retract that 5 to $6 million, is that number going to decrease any, is it going to increase?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
You mean as far the TCS picking up G&A costs?
Joe Suderlich - Analyst
No, as far as that G&A cost getting pushed into the Store part?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Oh no, it's gone from us, but it's been absorbed into TCS and then essentially -- TCS will set their own costs back to us plus profit margin and that's why we've said that -- we haven't factored in or modeled in any benefit from that transaction, per se. But to the extent that they fill that excess capacity that they have now that we used to own, but now they own, and can spread some of those fixed costs over different uses of that capacity and absorb those fixed costs they'll be a benefit to us. We just haven't modeled for that in our guidance.
Joe Suderlich - Analyst
All right, so basically that $5 million is going to get absorbed into the store part. That would seem you would have been gaining based on the way you guided?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Yes, it's going to come back up and it's going to be part of product cost now.
Joe Suderlich - Analyst
Okay, perfect. Thank you.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Sure.
Operator
And sir, our next question is from the line of Calvin Chin with Burnham Securities.
Calvin Chin - Analyst
Good morning Jeff and Mike.
Jeffrey Rutherford - CEO, President
Good morning Calving.
Calvin Chin - Analyst
How have you been Jeff?
Jeffrey Rutherford - CEO, President
Good, how are you?
Calvin Chin - Analyst
I'm doing all right. Listen I -- I think what I would like to know is --. I think we can see the external forces that would hurt your business and even today, oil keeps moving up, but what are some good things you can see that -- what are the things that you need to see, two or three things, ideally, how things are going to happen, that would make LESCO just do really well this year?
Jeffrey Rutherford - CEO, President
Sure, besides you buying a lot of property and putting turf in or [inaudible].
Calvin Chin - Analyst
Well we'll talk about that when you're in our office.
Jeffrey Rutherford - CEO, President
All right. Well here's the difference maker as far as I'm concerned and -- one of the things that we have found in the last few months is we have historically in the last couple of years had some cultural issues here. If we could go back in time I wouldn't do anything differently as far as what we've done strategically. And we did all those things based upon financial analysis and strategic analysis relative to where we wanted this model to be today. And we're there, but the difference would be we would have paid a lot more attention to our people and to our customers during that transition period, and paid more attention to change management.
We are now taking the time to go back, and as we stated in and I stated in the previous conference call verbiage, is that we -- I spent a lot of time visiting stores and Bruce Thorn has done the same. And visiting in with customers, in fact this week, I spent Wednesday out in the -- travelling to golf courses in the Cleveland area with one of our sales people. And the thing that is very much more apparent to me now than ever has been in the last four years is how important our people are to this model.
And we are going to spend a lot more time with our peoples so that culturally they understand what's going on and their set up relative to incentive comp, relative to customer service, relative to supply chain issues. If we are successful in addressing those issues and if we can get our people back and motivated and back into the high level of customer service that people have historically expected of LESCO then we'll be much more successful in the future.
Calvin Chin - Analyst
I think that's a good point because when we first spoke I think we were -- I guess you were expanding the Stores-on-Wheels concept and you were trying to get service people to become sales people and it's not a very easy transition. Is that what you're alluding to?
Jeffrey Rutherford - CEO, President
Well it's everything. It's that and particularly in 2005, but it's all the strategic steps we've taken. We've -- when we've taken those steps unfortunately we've left our people out there to deal with it on their own. What I'm saying is we're going to -- our people are much more engaged, our task force are composed of people not only from corporate, but they're all being led by people from the field. They're involved in the decision making. We want them incented because they are the people who are going to go out and drive our sales and they are the face of our company with our customers. And if we aren't treating our employees well then it's going to trickle down to our customer base.
So we want energized and properly incented, loyal employees, which generally we have, and we want them servicing their customers and making the right choices at point-of-sale to make us all successful.
Calvin Chin - Analyst
No, that's true. I think internally -- I mean externally, I think your stock prices reflect a lot of speculation. People say "Well, they got rid of their supply chain manufacturing aspect, so gee, what else is up for play". So I think that that probably doesn't -- it probably distracts your employees because people probably talk to them when they go out into the market and say "Well, what's going on?" and that uncertainty probably distracts them.
So it's good you're paying attention to that Jeff, and I look forward to seeing you and Mike in New York very soon.
Jeffrey Rutherford - CEO, President
Thanks Calvin. Let me say one other thing to everybody before we go, unless there are more questions. That in my travels to -- with our people and with our customers is the good news is this industry is -- the people in this industry, for the most part, are hard working, loyal people who love what they do and love this industry. And LESCO is full of those people and if we get out of our way and we do the right things from a leadership perspective, this model is going to do even better than we anticipated.
Operator
And sir, we have a question from the line of Brian Gonick with Corsair Capital.
Brian Gonick - Analyst
Hello, good morning.
Jeffrey Rutherford - CEO, President
Hello Brian.
Brian Gonick - Analyst
Just a couple of things, can you comment on some of the new store initiatives that you've been implementing to improve margins and that you are assuming the impact of any of those in your guidance, first of all?
Jeffrey Rutherford - CEO, President
Yes, as far as SKU assortment and what we're doing from a [polygramming] and marketing perspective, those are reflected in our guidance.
Brian Gonick - Analyst
So is there any way to say what kind of margin improvement you've been seeing from these initiatives?
Jeffrey Rutherford - CEO, President
No, I would say its all part and parcel of the model. I would say that because of all the transitions, Brian that we've gone through in the last four years and to isolate those specific areas, from an operating perspective are difficult.
We certainly can isolate them from a balance sheet perspective and you can see that reflected in our balance sheet now, where we're at. By the way, in my opinion and Bruce is sitting next to me and he's heard this enough that he knows it's coming, I think there is additional opportunity in working capital.
I think that we have a lot of opportunity relative to recognizing incremental [profit] that's seasonal. I think in the very cold areas of the country, the Northeast and upper Midwest, we carry too much products over the cold season and it's prompted Bruce to -- well go ahead Bruce.
Bruce Thorn - COO
Let me, just to add, I think one of the best benefits from a good merchandizing planogram or planoguide structure that we've gone through is one, understanding our working capital of every point-of-sale and in structuring that a little bit more than having stocking assortments that could be all over the place.
So just having the planoguides allows a standardized stocking assortment that we then can set up metrics for and turn quicker through the upcoming years. So that just gets us into the right structure to move forward.
The other things that we have not been able to measure yet have been the impact of merchandizing and putting product in different places in the store. I think we'll start seeing some of that this year and then we'll be able to talk about it, but primarily just getting the stocking assortments right to the point where we can measure inventory, working capital in the right way and even control it a little bit better at the store level is what we're really going after.
Brian Gonick - Analyst
Okay, previously the company has said that there is a longer term goal or opportunity to achieve 5 to 10% operating margin, could you comment on that?
Jeffrey Rutherford - CEO, President
Now that we have the new model, and I'm not backing off from those statements so bear me out. We are -- we now have a model that is basically based upon -- the bulk of the model is based on square footage in our stores. And the model now is about, in my mind, three things, the model is about expanding that square footage at the same level of profitability that our existing stores are now achieving, that's number one.
So real estate and ability to open stores are extremely critical to the value creation of this model. The second piece of it is gross profit dollars per square foot. I personally, when you -- if you're in the manufacturing business with limited capacity you need to be concerned about percentages. When you're in a business that's about square footage, you need to be concerned about gross profit dollars per square foot and whether that happens at a 50% margin or a 25% margin, I don't care as long as we're maximizing dollars.
So what we are concerned about in tracking is gross profit dollars per square foot. We look at it for our base, our 225 stores, we look at it for each class that we have and we have an expectation where every store is going to be and that -- the expansion of the square footage with gross profit dollars per square foot is what really drives this model.
The third metric we look at is gross margin return on inventory, GMRI, and that keeps us in the place relative to inventory turns. We have to get our inventory turns up we carry too much inventory during non-seasonal periods.
So those three things are what we're really focused on. Everything else in the model, whether it's the cost of real estate, whether it's the G&A costs, they're all leveragable. What really needs to expand is square footage, gross profit dollars per square foot and the increase in GMRI.
How that relates then to gross profit percentage -- or operating profit percentage is -- it's going to happen. And the target would be, yes, we would love to be at 5%. I think if you look at -- and I use the term, just because they have square footage, if you look at retailers they all have different gross profit percentages, they have different gross profit dollars per square foot and they're all striving for a couple of things and ultimately it's gross profit percentage and return on invested capital. They can get there different ways, they can get there with high turn and lower margin, like a WalMart, or high margin and low turn like a Nordstrom's, but they're all heading to the same place.
Brian Gonick - Analyst
Right.
Jeffrey Rutherford - CEO, President
The thing that we -- that will take us to a higher gross profit dollars per square foot is too continually evaluate our price elasticity. And are we priced where we can maximize gross profit dollars per square foot, that's our challenge and those are some of things we're working on, that could change them all.
Brian Gonick - Analyst
Okay. Finally, on your new service center operating model assumptions, those are those assumptions applying just going forward or should they also apply to the stores you've opened in the last couple of years?
And then could you also just update us on what's the cost to open up a new store is, pre-opening and capital expenditure and working capital?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Yes, Brian, those metrics can be used for both the stores that we have opened since 2003 as well as new store openings.
Brian Gonick - Analyst
Okay.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
As far as the investments in a new store, it's been fairly consistent over the past couple of years and we don't expect that to change right now. Where we have between 50 to $60,000 of fixed capital and about 190 to $200,000 of inventory, but that's unlevered inventory. So that would be a total inventory investment.
Brian Gonick - Analyst
Pre-opening?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Pre-opening is only -- it can -- there's two parts, I guess two components of our pre-opening, one that is relatively fixed and one that's variable.
So we have some costs in pre-opening that are going to be incurred, for going out and looking at sites, reviewing new sites for places that we may never open in. So that has to go into pre-opening costs and then the actual opening costs themselves. So I think if you use this year as kind of the [proxy], the '06 guidance that we've given on a per-store basis that would get you fairly close as you model it out.
Brian Gonick - Analyst
So $2.5 million divided by 40 stores?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Yes.
Brian Gonick - Analyst
Thanks.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
And remember, that's going to give you kind of a good average, but there is costs that go into their for future -- for looking at future sites as well.
Brian Gonick - Analyst
Right, thanks a lot.
Jeffrey Rutherford - CEO, President
Thanks Brian.
Operator
And sir, our next question is from the line of Greg Mckinley.
Gregory Mckinley - Analyst
Just one quick follow-up if I could. Could you give us a little color on the traffic turns you're seeing in the stores, I know your comp growth was very strong. How much of that is driven by people coming in and shopping versus people paying a higher-ticket item per transaction?
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
So transaction versus ticket?
Gregory Mckinley - Analyst
Yes.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
Well average ticket, it did have an effect and there's an inflationary effect in there that we've calculated at approximately 4%.
Gregory Mckinley - Analyst
Okay.
Michael Weisbarth - CFO, Principal Accounting Officer, VP, Treasurer, Controller
So and what we have -- you can see in our gross profit percentages that we haven't seen a significant expansion of -- on the pricing side, we've maintained gross profit. So generally speaking, everything above that would be -- whether you have an incremental market basket or transactions and it's a combination of both.
Gregory Mckinley - Analyst
Yes, okay thank you for the clarification.
Jeffrey Rutherford - CEO, President
Sure.
Operator
And sir, we have no further questions. Back over to the group for any further comments.
Jeffrey Rutherford - CEO, President
Okay. Well it's taken a little longer than I think some people wanted it to take, including us. But we've finally got the model now to where we thought we wanted to get it three years ago, three-and-a-half years ago. We now have the model that's going to create the most value for our shareholders, the highest service for our customers and the greatest opportunity for personal wealth and advancement for our employees.
This management team is now working for all of our stakeholders. For our shareholders, our employees, our customers and somewhat for our suppliers, but we'll never admit to that to them.
So we will take all calls, shareholders, customers, employees. We're looking forward to 2006, we have a great model. It's time to expand that model, it's time to get out of the way and make that model create the value that's inherently within it and we look forward to talking to everybody during 2006. Thank you.
Operator
Ladies and gentlemen we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.