LL Flooring Holdings Inc (LL) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators fourth-quarter and year-end earnings conference call. With us today is Mr. Jeff Griffiths, CEO of Lumber Liquidators and Mr. Dan Terrell, CFO of Lumber Liquidators. As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company. I would like now -- excuse me -- I would like to now introduce Ms. Cara O'Brien of Financial Dynamics. Please go ahead.

Thank you, operator. Good morning, everyone and thank you for joining us today. Before we begin, let me take a moment to reference the Safe Harbor provisions of the United States securities laws for forward-looking statements.

This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in Lumber Liquidators filings with the SEC. The information contained in the call today is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time.

Lastly, Lumber Liquidators undertakes no obligation to update any information discussed in this call. Now I am very pleased to introduce Mr. Jeff Griffiths, President and CEO. Jeff, please go ahead.

Good morning, everyone. Thank you for joining us for Lumber Liquidators' first earnings conference call as a public company. We are very pleased to be here today to discuss our performance in 2007, as well as our outlook for 2008.

I would like to take a moment to thank all of our employees for their efforts in the past year as we prepared and completed our IPO. With me on the call today is Dan Terrell, our CFO.

I would like to begin today with a review of some of the highlights from the past year's performance. Dan will then review our financial results in detail and provide our outlook for 2008. I will return to discuss our ongoing strategy and open the call to questions.

As some of you may have heard us convey during the roadshow at the end of last year, we are excited about Lumber Liquidators' attractive store economics, appealing value proposition and the Company's opportunities for growth. We believe these important strengths have enabled us to deliver strong results for the quarter and the year.

We generated healthy sales and earnings as customers continued to respond positively to our unique and appealing value proposition of price, selection, quality and availability. We gained solid momentum in gross margin expansion during the second half of the year as we refined our product assortment, implemented uniform pricing standards and controls throughout our stores and improved certain processes.

We also made investments in our organizational infrastructure that we communicated during the roadshow as we laid the foundation needed to implement our Company's long-term growth strategy. These investments, which are now substantially complete, have resulted in a short-term increase in our SG&A expenses as a percentage of sales. However, we expect to leverage these expenses as we continue to expand our footprint and grow our top line.

Overall, we ended the year with strong momentum as we continue to maximize the recent operational enhancements we have made to our business. We successfully implemented our new store opening plan in 2007 and opened 25 stores for the year with five store openings in the fourth quarter. We opened stores in a balanced mix of new and existing markets and are using better analytics for our site selection, which is translating into strong performance from our new stores. We ended the year with 116 stores.

As a backdrop to our financial results in 2007, we believe it is useful to provide additional color around the investments we have made in our business over the past two years. We took several important steps to prepare the Company for growth for many years to come by bringing discipline, expertise and depth to our growing business.

We developed and strengthened our staff across all levels of our organization. We added critical positions within our management team and increased other store support infrastructure at our headquarters to properly manage our new public company and to establish controls as we grow.

Further, to support our growth, we nearly doubled the size of our regional store management to ensure better oversight of our stores and productively manage our fast-growing chain. We also strengthened our in-store sales teams to better serve the needs of our customers efficiently and effectively.

We significantly upgraded our merchandising processes in the areas of inventory planning and allocation to ensure a steady and appropriate flow to the right locations. We established a strong, experienced merchandising team to manage our relationships with our vendors, expand our product assortment and forecast product demand. As a result of this increased attention to merchandising, our in-stock positions and overall inventory management improved significantly.

We work to improve the quality of our store presentations and showroom displays to improve the customer shopping experience and drive sales. We also developed uniform planograms to maintain the right mix of product samples across our store base. Additionally, we improved the customer interface on our website to better enhance customers to make buying decisions and check in-stocks in their local stores.

All of these improvements and investments were ultimately designed to lay the groundwork for our long-term growth. We continue to be very excited about our future prospects and believe that our market leadership, strong value proposition and now, our sound infrastructure provide us with a solid foundation from which to continue to efficiently expand our business.

I will be back in a few moments to discuss our ongoing strategy, but first, I will turn the call over to Dan to speak about our fourth-quarter and full-year 2007 results in further detail, as well as provide our outlook for 2008. Dan?

Thank you, Jeff and good morning to everyone. As Jeff mentioned, I'm going to provide some additional details on our results for the fourth quarter and full year 2007 and then provide our outlook for 2008. I will start with our results for the fourth quarter. Net sales for the three months ended December 31, 2007 grew to $105.5 million in the fourth quarter of fiscal 2007 from $84.8 million in the prior year period, an increase of 24.4%.

Comparable store net sales increased 8.6% on top of a 12.2% increase in the fourth quarter of 2006. The growth in our comparable store net sales was primarily driven by increased volume, which we generally measure in square feet and a slight increase in the average retail price per square foot sold. A customers responded positively with increased demand for our expanded product assortment, primarily premium products and our commitment to a more consistent in-stock position bolstered the confidence of both our sales associates and our customers. This is important given the time between customer order and delivery for our invoice sale. As many of you know, can be up to a month or more for many of our products.

In addition to the increase in comparable store net sales, we opened five new stores during the fourth quarter, achieving our target of 25 new store openings in 2007 and sales from these new stores were a significant driver of our top-line growth for the quarter.

Gross margin increased to 33.9% from 31.7% in the prior year period. The increase in gross margin is due in part to the introduction of higher-margin premium products as we optimized our merchandise selection during the past year. These premium products included handscraped solid and engineered hardwood, more durable laminate and strand bamboo.

Also, as we discussed on the roadshow, the gross margin in the fourth quarter of 2006 was pressured by promotional activity as we cleared certain inventory, including some liquidation buys and products introduced early in 2006 that did not meet our expectations.

Selling, general and administrative expenses were $30.8 million or 29.2% of net sales for the fourth quarter of 2007 compared to $24.1 million or 28.4% of net sales for the fourth quarter of 2006. The increase in SG&A in the fourth quarter of 2007 included stock-based compensation expense of $1.2 million or 1.2% of net sales, which was related to an acceleration and divesting of certain stock options and the recognition of certain restricted stock units.

In addition to this increase in stock-based compensation expense, we saw SG&A increases in labor costs related to the growth in our store base and higher occupancy expenses related to those new stores, advertising costs as we expanded our national branding campaign, labor costs related to our infrastructure investment, now substantially complete and certain other expenses related to operating as a public company. Excluding the stock-based compensation expense however, we leveraged total SG&A expenses over increased sales.

Net interest in other income for the fourth quarter of 2007 was $132,000 versus a net expense of $109,000 in the same period of 2006. The effective tax rate was 39.5% in the fourth quarter of 2007 and 38.8% in the fourth quarter of 2006. Net income for the fourth quarter of 2007 almost doubled to $3.1 million or $0.14 per diluted share based on just under 25 million fully diluted shares outstanding. In the fourth quarter of 2006, net income was $1.6 million or $0.11 per diluted share based on just under 23 million fully diluted shares outstanding.

I would now like to discuss our results for the full year. Net sales for the full year ended December 31, 2007 grew 22.1% to $405.3 million from $332.1 million for 2006. Comparable store net sales for the year grew 8.6% on top of comparable store net sales growth of 17.3% in the prior year. As in the quarter, comparable stores' net sales growth was driven by volume from increased demand and a slight increase in the average retail price per unit sold.

Consumer demand resulted from an acceptance of our expanded product assortment, again primarily premium products, and greater sales of moldings and accessories, one of our few ticket add-ons. Also, we continue to benefit from the maturation of our comparable store base where, as many of you know, sales generally increase faster in months 13 to 36 than at our more mature stores. With our 25 new store openings in 2007, we ended the year with 116 stores in 43 states. As we discussed on the roadshow, our store openings in 2007 were in a nearly equal mix of new markets and existing markets.

Gross margin for 2007 increased slightly to 33.3% from 33.2% for 2006. As Jeff noted, we began to see gross margin expansion momentum in the second half of 2007 as we benefited from a pricing discipline and higher-margin product mix.

SG&A expenses for the full year 2007 were $116.3 million or 28.7% of sales compared to $88.7 million or 26.7% of sales in 2006. The increase in SG&A as a percentage of net sales primarily reflects higher labor and occupancy costs due to the growth of the new store base and now substantially complete investment in store support infrastructure and an increase in other expenses relating to operating as a public company.

SG&A also reflects higher total stock-based compensation expense, $6.2 million in 2007 versus $1.4 million in 2006. This $4.8 million increase includes the acceleration and the vesting of stock options in recognition of restricted stock units I mentioned earlier, as well as $3.2 million in stock-based compensation expense related to the variable plan, up from $1 million in 2006. The variable plan is outlined in detail in this morning's press release and our 10-K, which we expect to file today.

The increase in SG&A as a percentage of sales was partially offset by our ability to leverage the increase in national advertising as we gained momentum in building the brand through scalable campaigns. Occupancy costs as a percentage of sales remained unchanged year-over-year.

Absent the stock-based compensation expense, SG&A expenses in 2007 increased 90 basis points versus 2006 and included a $3.4 million increase in our store support infrastructure or some 80 basis points. Net interest in other income was an expense of $308,000 for 2007 compared to an expense of $355,000 in 2006. The full-year effective tax rate was 38.8% for both 2007 and 2006. Net income for 2007 was $11.3 million or $0.68 per diluted share compared with net income of $12.9 million or $0.86 per diluted share in 2006.

Turning now to our balance sheet. We had $33.2 million in total cash and cash equivalents at December 31, 2007, reflecting net proceeds from our initial public offering of $36.2 million and the immediate repayment of $6.6 million in outstanding debt. We are essentially debt-free at year-end 2007 other than some miscellaneous notes payable in 2008.

Merchandise inventory was $72 million at year-end 2007, which was in line with our expectations. Our inventory levels earlier in 2007 had risen as we put in place our new merchandising team, implemented more traditional retail forecasting techniques and committed to a more consistent in-stock position. Once the new team was in place, we were able to coordinate more detailed merchandise planning with our vendors and merchandise inventory levels returned to a level more appropriate with the demand in the sales cycle. We believe future changes in our inventory levels will be more closely tied to the growth of our store base.

Working capital was $76.9 million at year-end with a current ratio of 3.14 times. This compares with working capital of $29.7 million at year-end 2006 and a current ratio of 1.90 times. Capital expenditures were approximately $6 million in 2007, representing primarily fixtures and leasehold improvements for new stores, trailers that deliver our products from our warehouse to our stores and IT equipment, including new POS equipment.

Before I turn the call over to Jeff for a discussion of our overall outlook and planned operational activities in 2008, I will provide our financial guidance for the year. We expect to generate total sales for the year in the range of $475 million to $490 million with comparable store sales growth in the mid-single digit range and a plan to open 30 to 40 new store locations.

We anticipate earnings per diluted share will be in the range of $0.70 to $0.78. We expect approximately $5 million to $7 million in capital expenditures for 2008 that will be used primarily for the opening of new stores, maintenance of our existing stores, an upgrade to our finishing line and certain upgrades to our IT systems. I would now like to turn the call back over to Jeff for his closing remarks.

Thanks, Dan. As I mentioned earlier, we are very pleased with our performance for the fourth quarter and full year of 2007 and believe that we now have the talent, processes and products in place to continue to grow the business. We began to see the benefits of our operating improvements in the second half of 2007 as demonstrated by our sequential improvements in operating margins even as the macroeconomic conditions became more challenging. We are now off to a solid start in 2008 and are encouraged by our performance to date in the first quarter.

I should mention that despite the challenges in the housing industry, we have been able to continue to grow our business in part because we primarily target existing homeowners who are attracted to our low average ticket and value proposition. Further, while we are cognizant of the broader macroeconomic trends affecting many retailers, we believe that we are solidly positioned to continue to grow our business. As a company with a relatively small store base, we have room to significantly expand and capture marketshare in our highly fragmented industry.

Operating improvements we have made across our organization over the past two years have enabled us to have better store sites that are now based on analytics, an improved in-stock position, improved consistency in our pricing, an enhanced presentation of our merchandise in our stores, more appropriate staffing levels in line with customer traffic and marketing that is more aligned with our target customers.

We intend to continue to implement our multiprong growth strategy, which includes expanding our low-risk, higher return store base, growing our comp store sales, expanding operating margins and leveraging our brand marketing across multiple channels. We have attractive store economics and a low-risk model that will allow us to continue to grow our store base quickly, profitably and efficiently. We plan to open 30 to 40 new stores during the year and in line with our approach to store openings last year, we expect to balance our store openings between existing and new markets.

To date this year, we have successfully opened eight stores in eight different states. Our new locations include stores in Colorado, Illinois, Missouri, New Hampshire, Ohio, Pennsylvania, South Carolina and Texas. Six of these new store locations are in new markets and two are in existing markets. These new stores are ramping ahead of our new store model assumptions. We remain very pleased with our ability to ramp up our new stores very quickly and operate profitably in all of our individual locations within a short timeframe.

As I have said previously, when I joined this company, I saw a fantastic business run by great people. I knew that with some added discipline and the appropriate infrastructure, Lumber Liquidators had tremendous potential for further growth. Today, we are even more confident in our potential.

In closing, I would like to say that we are very proud of what we accomplished in 2007 and look to 2008 and beyond with optimism and confidence. We have a great value proposition. We have the right infrastructure in place. We are the leading specialty retailer of hardwood flooring in a highly fragmented market. We have a great low-risk, high return store model. We are taking marketshare despite the challenging macroeconomic environment and we have plenty of room to grow.

We would now like to answer any questions that you may have. Operator?

(OPERATOR INSTRUCTIONS). Matt Fassler, Goldman Sachs.

Thanks a lot and good morning. A couple questions. First of all, if you could just give us a little more color on the drivers of the gross margin move. You nicely beat our number there and talk to their sustainability as you move into 2008.

Much of the improvement in gross margin was related to the product mix. We expanded the assortments last year, primarily bringing in -- within each product category, we brought in more high-end products. Laminates, we brought in an assortment of 12 millimeter laminate. In the Durawood, we brought in an assortment of handscraped. In bamboos, we brought in an assortment of strand and stained bamboos. All those products carry higher margins than the low-end products in each one of those categories and at price points that are still significantly below our competition.

We also -- with the increased training and staffing at the store level and the expansion of staffing and the merchandising team, we were able to significantly increase our moldings and accessory sales, which are important add-ons and they carry margins that are significantly higher than our average margin.

We also made some improvements in our transportation, much more efficient modes of delivery to the stores, some better planning, which helped improve there. We expect that all of these enhancements and improvements are going to continue to help to drive improvements in margin. We feel that we have the potential to continually improve margin from where it is now.

And a lot of these efforts were brought into the store in the fourth quarter, you are saying? In other words, the things that -- go ahead, I'm sorry.

I'm sorry. Yes, much of it -- we really were laying the groundwork for it in the first three quarters of last year and then we really started to see the benefits of it in the fourth quarter.

So there should be some legs through the rest of the year from some of the things that started to kick in in Q4?

Absolutely.

I would just add in that you began to see the benefit in the third quarter where margin improved to 33.8%. So we had talked about some gradual expansion from there and as Jeff said, it was really implemented in the first and second quarter and we started to see the benefit in the third quarter and we expect some gradual expansion through 2008.

To the extent that the payables ratio is down, is there any relationship between gross margin trends and what you saw in that line of the balance sheet?

The payables ratio?

Yes, payables to inventory?

Matt, the payables relationship looked a little odd because of the way inventory peaked earlier in the year. We basically built inventory as the merchandising team was put in place in the second quarter, reached a peak in the summer. As we really implemented some more traditional retail techniques, that inventory declined to September 30 and then came back through to what is a more predictable level for us at the end of the fourth quarter. That impacted part of the timing of the payables of the product we already have on hand. Certainly, we have got some margin benefit from the merchandise planning that was put in place. As you know, in our world, merchandise planning helps the vendors with their yield and that is what they can help pass on to us in the form of margin.

Got it. And then finally, your comps held quite consistently over the course of the year. You are one of the few retells that didn't see meaningful deceleration. You guided to mid-single-digit comps for 2008, which would still be terrific relative to what others are putting up. It does reflect somewhat of a slowdown. So is that based on what you're seeing year-to-date or is that just sort of caution based on what is happening in the environment?

I think it is more a caution as to what is happening in the environment and just a bit of a maturation of the store base, but more cautionary because of the environment.

Understood. Thank you.

Mitch Kaiser, Piper Jaffray.

Thank you, guys and good morning. I was wondering on the new store productivity, it looked like in the fourth quarter, it was maybe a little bit better than we had modeled. And then Jeff, you had mentioned that the new stores that you opened recently have been ramping ahead of expectation. Can you just comment on kind of what you are seeing or what you are doing there, provide a little more color for us, please?

I think the whole process that we put into place for new store openings where we just -- we formed a committee to research locations and analyze the potential. We have done some upgrading of the locations. We now have a process for -- having a team that will build out the store so that when the store opens, it has a complete assortment of product and the staffing has been hired and trained ahead of time.

We have a more organized marketing strategy to help support new stores. So we feel like we are much better prepared today the store opens and we think that is reflected in the performance and we also think it is just another example of our strong value proposition and the strength of our national marketing and our branding so that when we do open a new store, whether it is in a new or existing market, there is strong demand when we open because the customer is familiar with our name and our product and they see the great pricing and the great product and a great level of service and they just are drawn to it immediately.

Okay, that's helpful. And I know there is a lot of concern about the macro. Would you be willing to comment kind of regionally what you are seeing? I know Florida and the Gulf Coast have been somewhat of a concern for others. Maybe if you would spend a moment if you would just kind of commenting regionally.

Yes, certainly that is something that we monitor very closely, but I will start out by saying, keep in mind, we have a relatively small store base and we are a national chain. There is no one market where we are saturated. Even in a market like Florida, there is potential for a lot more stores, so we really are not servicing the full customer base there. So I think that is an important thing to keep in mind, that we are not a mature retailer that is totally dependent on the market growing for us to grow.

The second thing is that our strong value proposition I think in a market that is maybe more challenging and consumers are more cost conscious, they see the great pricing and the great quality of the product that we have to offer. I think it helps draw customers who maybe are more price-sensitive than they were previously.

But having said all that, I will say that our stores in -- the two markets that we seem to get asked about the most are Florida and California and last year, our stores were comped positive in both of those markets and are continuing to comp positive so far this year.

Okay, that's helpful. You mentioned the quarter is off to a -- the first quarter is off to a solid start and I know we only have a couple of weeks left. Is it fair to assume that the comps would run kind of in the mid-single digits then for Q1?

We are comparable with where we are so far in the quarter. The momentum that we saw in the latter part of last year is continuing. So we are, like I said, we are comfortable with where we are with it.

Okay, and then lastly, to me, it looks like you are going to generate maybe just a little bit north of about $10 million in free cash flow. Is that kind of what your -- the guidance implies and then what would the uses of that be?

Mitch, that is materially correct and we are -- with the cash flow, we don't anticipate paying any dividends as we say, but as far as deploying the capital, we are not taking anything else off the table. We are going to continue to fund the operations and the store growth, but as you know, the store growth is low capital investment and a pretty quick return.

There are certainly additional deals out on the market as far as liquidation buys and inventory in this market and we are deploying some of the capital that way where it is advantageous to us, but no decision has been made as far as a major plan for 2008 and nothing is off the table, except we are not going to pay a dividend.

Okay, sounds good. Thanks, guys and good luck.

Hardy Bowen, Arnhold and Bleichroeder.

Yes, Jeff, I think I have noticed that your price differential on the higher-end product is tremendous and then on the some of the lower-end products, it is not as much or occasionally even above somebody like Home Depot I think. Is that your plan going forward or are you thinking of other things?

Hardy, certainly, there is a broader difference in price in the higher-end products just because they are products that retailers tend to make a higher margin on and we think that that is one of the strongest differentiators for us is that, the quality products that really attract people to us and the products that people ultimately buy from us most of the time are the products that we are significantly different in pricing and we think that's a huge competitive advantage for us.

Certainly, on the leader products, as you know, usually margins are tighter on those types of products and retailers tend to use those products for short-term promotion so there tends to be more volatility in those prices moving around. We certainly are very sensitive to that and we shop our competition regularly, but I can't say that every single day in every single store in every leader product that we are the sharpest. We intend to be and we work hard towards that.

But I think the thing to keep in mind there is that because of our highly trained and qualified store staff and the level of service that we offer, our store teams do an excellent job of maybe helping a customer not to buy that leader product that might not be the best product for them, but to show them what other products we have that are available and maybe move them into a higher-quality product and then we also do a much better job with the add-on sales -- the moldings and accessories and things like that. So I think that that is really the thing that we key on when we look at the total package that we offer to the customers as opposed to what is the price on a single leader item on any given day.

Yes, your store service is light-years ahead of Home Depot or Lowe's for sure.

We think that is very important.

I guess fuel costs are up and it is somewhat of a concern. I know you were looking into doing cross-docking in China. Do you think that is possible or is that something you would think of going ahead with it?

One of the big thrusts that we made last year was just understanding how we move product, how we allocate product and the fact that we are planning better now and we are doing better forecasting and we are focusing on doing more direct-to-store deliveries and we are looking at -- one of our goals this year is to set up some type of relationship in the Far East to do consolidations. So we feel that all these initiatives that we have underway should be able to offset some of the rising fuel costs.

Right. And I guess we should think about home office. SG&A you mentioned. We have completed most of what we wanted to add. So we should think of that may be going up 10%, that kind of a number for a couple of years rather than in line with sales, would that be fair?

Certainly not in line with sales, Hardy, but maybe 5% to 10% would be fair as we annualize what we added in 2007 and 2008 and then just increase it -- gradually increase it in 2009 and thereafter, but certainly will not approach the sales increase.

Okay. And advertising seemed to be going up about 15% I think in the second half of last year. Is that the kind of thing that we are thinking about for 2008?

We are always looking to see how we can leverage our national campaigns while still getting the most impact from the advertising dollar. So historically, we have been able to get somewhere around 60 basis points of annual leverage. In 2007, we got a little bit more than that full year against 2006, so that is certainly the path that we are on and we intend to continue down.

The stock compensation, did you mean to imply that some of the stock compensation this year would not be repeated in 2008, that expense or would it go up -- what is more thoughts about that for 2008?

There are three components of stock compensation that we are disclosing in the K and one of them was an acceleration of vesting related to our IPO and it also triggered the recognition of some stock units and in the fourth quarter, that had about a $1.2 million impact and we don't anticipate that recurring.

There is also the variable plan, which is a plan between Tom Sullivan, our founder and his brother, one of our regional managers and that had impact going through 2007, $3.2 million in 2007 versus $1 million in 2006 and we don't anticipate 2008 stock comp expense, but we may have some if that matter is in arbitration.

Then there is recurring stock compensation expense, which is about $1.7 million to $1.8 million in 2007 and we expect that to continue on and then we will do reasonable prudent grants to management once a year or so, so that will basically raise stock compensation, but not significantly.

Richard Linhart, Opus Capital.

Thank you. Most of mine have been answered, but I will ask one or two more. Of the $72 million of inventory, how much is actually in the stores versus in the potential distribution centers?

About $40 million was in the stores. As the stores mature, they will carry a different level of inventory. They will generally start much lower and then they will build as the order volume builds because a lot of our inventory carried in the store relates to customer orders. The warehouse and in transit to the stores was about another $20 million to $21 million and then we had product that was what we refer to as on the water inbound to us from overseas of about $12 million or so.

Great, thank you. And in terms of the new stores opened in '07, how are they tracking versus prior year new store openings?

Their performance is very similar as a group in terms of their monthly sales and their comp percentage.

Great. Okay. Thank you. Congratulations on the great start as a public company.

John Curti, Principal Global Investors.

Good morning. I had some questions on your new store openings for this year. If you could kind of break out by quarter how those were going to fall and how many of those have had leases signed?

We opened eight in the first quarter so far. Our feeling is that it will be anywhere from probably seven to nine per quarter at the high end. I don't know the exact number of leases that we have signed, but it is a very short process from finding a location to negotiating the lease to actually signing it. We have situations where we've found locations and within 30, 45 days, we have signed a lease and we are opening for business. We have these mobile trailers that we will put in the parking lot of a store and have a -- we will start taking orders the day after we've signed the lease before the store has even been built.

And the mix of stores, new markets to existing markets for '08?

The goal is to be 50% new and 50% existing. Of the eight that we have opened so far, as we said, six were new markets and two were existing markets.

And then what weighted average share calculation are you using for your earnings per share guidance for this year and a tax rate?

We are just north of about 27.5, 27.5 million for the share count.

And the tax rate? Anticipated to be about the same as '07?

About the same.

And then lastly, what percentage of your sales mix is coming from molding and accessories? You mentioned that is a very high-margin add-on. What is the potential there?

Last year, it was about 10% of sales. Potentially it could be slightly higher than that, maybe another percentage point or two.

Just to add in, it grew from 8% in 2006.

But the sales staff has been trained to put increasing emphasis on that as an add-on type?

Certainly, we are really -- if we are going to -- the best possible service that we can give to a customer is to make sure that they can have access to all the products that they need to complete the installation and moldings and trims are an important part of that.

The customer, when he is buying this product, is it mostly self-installation?

It is about 50% do-it-yourselfer and about 50% who will hire an installer to do it for them.

Thank you very much.

[Maya Averson], [SCW].

Good morning. Regarding fourth-quarter sales and overall for 2007, what percentage comprises online versus brick and mortar?

We don't break out online versus brick and mortar because there is a process that the consumer generally will visit both the website and the store. Many times, the consumer will visit the website first because it will be -- it's oftentimes how the customer gets introduced to the Company and to the product, helps them find a store location, helps them do research on what type of flooring they might want to have and oftentimes, a customer will order something on the Internet and have it delivered to the store. The store then gets credit for that sale. So we don't necessarily track it that way.

Do you have any trends as far as how often the product gets delivered to your stores versus someone buying it online?

Again, what we measure is total performance and we measure traffic on the web and we measure transactions. Whether they are directly transactions that are shipped to the customer or shipped to the store for pickup, I don't know exactly what that breakdown -- what that breakout is.

We feel like customers in general visit more than one avenue. They will either visit the Web and the store, request a sampler catalog. They can place an order through any of the channels and Web orders are right now about 5% or 6% of our total order volume, which has been increasing since May of '06 when we introduced the ability to take an order online.

Okay, thank you.

Ed Antoian, Chartwell.

Good morning, guys. First question, a little more granularity on SG&A. I don't know what you're willing to give me, but in particular advertising, how much was it year-over-year and what are your plans for advertising in '08?

We will have a more detailed breakout in the 10-K for the full year, but for the quarter, we were able to leverage advertising versus '06. Now, advertising on a quarterly basis can vary based on timing what is available. We shoot for an annual leverage and look how to best use our dollars. So we haven't really broken out the fourth-quarter advertising, but I will let Jeff kind of talk to you about the plans going forward in advertising.

We have said on the roadshow and it is to continue our goal to, on an annual basis, leverage our advertising expense by about 40 basis points. Now some years, it could be a little bit higher than that; some years, a little bit lower than that. But we feel over the long term that that is a very achievable goal that as we continue -- since a significant part of our marketing spend is national as we expand our store footprint, certainly we are going to be able to leverage a lot of these expenses and get some significant added benefit from that as we add to our store base.

Jeff, is there a preopening cost that you guys book?

We do expense as we go, but there are just -- it is such a low capital investment in our stores and there is very little advertising that we put around a new store opening. There is not a lot of fanfare and hoopla, so it is just not a material number.

And can you talk about the cost of new stores versus old stores? Are you spending significantly more as you try to get a little better location?

Occupancy costs as a percent of total sales were the same last year as the previous year. We expect that to be about the same again this year. We are -- we have slightly upgraded the types of positions looking for more visibility, looking for more consistency in the size and shape of the building so that it is easier to operate in, but it is, as a percent of total sales, it is insignificant. Costs of building the store are very low. Actually that I think is actually running a bit lower than what we had assumed it would be. So as we have said, these stores are very inexpensive to build and to maintain.

And just one last one on same-store sales, my assumption is that the older stores, at least some group of the older stores, are experiencing negative comps. Can you give us some idea of what percent of the stores and the number of the stores that are experiencing negative comps?

Well, our mature stores for the year had positive comps in the low single digits.

How do you define mature?

Three years and older.

Okay, thank you.

So within that group, there were some stores with negative comps and some stores with positive comps. I don't remember the exact number. We do assume that when we open a second or third store in the market that the existing stores will probably go into negative comp territory for the first 12 months. What we are seeing generally is that they will start to comp positive as the second or third store goes into the comp pool. So they are doing what we expect them to do.

My last question is insiders -- they were anxious to have this company go public and get liquidity, probably not the right question to ask, but I will. When do you suspect that they will be looking for more liquidity?

We have no specific plans in place at this time.

Thanks, Jeff.

(OPERATOR INSTRUCTIONS). [Maurice Daya], [Adgeno].

Thanks, hi, gentlemen. Given the buildup in SG&A infrastructure last year, what kind of comps do you think you need to hold the SG&A this coming year?

The SG&A increase primarily related to payroll increases here at the office and what we are calling our store support. We have got a disclosure in the K that that increase was about $3.4 million. We don't expect that, as an earlier question, we don't expect that to increase anywhere near what sales will increase. So you can see the leverage that we anticipate getting with our store sales expected to increase 17% to 21% in 2008.

I mean can you pin down a comp store sales number, 2% or 3% or 1% that you think you need to just toe the SG&A line above which would be leverage?

We don't really do that analysis for public disclosure. We look at it internally. You have got to remember though that with our store model, our stores do ramp really quickly, they become profitable very quickly, these are our new stores. They have got a high return and a low capital investment. So when we look at our projection for revenue, we are certainly looking at a comp store and new store mix and the profitability of each, but we don't really disclose what comp number we need to --.

A couple of things to just keep in mind. When it comes to payroll, the store payroll is mostly commission-driven, so it is tied directly to sales so that if sales are lower, the store payroll will be lower. It is not fixed the way most retailers are. And we also have some flexibility in our advertising and our marketing spend, that we can move that based upon where sales are as well. So we do have some flexibility in moving that.

If you look at our guidance and you look at our ranges, figure that the lower end of the range is the lower end of the comp range and the higher end of the range is the higher end of the comp range. So there is some -- definitely some leverage opportunity in there.

Thanks. Could you elaborate on the comment in the press release or your comments about part of the gross margin last year coming from a significant reduction in promotional discount versus '06? Did you have a high level in '06 that went to a normal level or why were you able to do that?

It was a high level -- in the fourth quarter of 2006, we took an opportunity to clear out some older inventory and that was the leading driver of the margin in that quarter. We do not expect that type of occurrence again. We think we have -- we know we have much better controls in place for managing the inventory and controlling the obsolescence, so we feel that that will not occur again.

Thanks and lastly, could you comment on the competitive environment and are you seeing some pressures perhaps from some weaker independents going out or stepped up promotions anywhere to clear inventories or how might the environment be evolving now versus six months ago?

That's a good question because that really -- that's one of the great things about being in this space is that the competition is so fragmented and you are correct in saying that there are some competitors who are closing down and going out, but there is no one competitor at retail who can have that big of an impact on business that by closing that they have a negative impact on us. We see at it as an opportunity to continuing to gain marketshare as there is some reduction in store count in the category. We also see it as an opportunity where there is some excess closeout inventory available there, which we had certainly been taking full advantage of the last few months.

So we are seeing no pressure? You're not seeing a higher level of promotions now yet or are you beginning to see that yet?

Again, if you look at -- most -- over 60% of this business is independent flooring stores, usually one or two store operations whose primary focus is on carpet. They tend to carry less inventory in hardwood. Most of their hardwood business is special order, so even if they do get into financial difficulty and need to clear out inventory, they are not -- one store in one market just is not going to have enough inventory to really have an impact.

Thank you.

Michael Keara, Merrill Lynch.

Thanks, good morning, guys. Congratulations on the really strong comp and obviously, it is a tough housing environment. Jeff, I am talking about the store support infrastructure, you said that you added regional managers, is that correct?

Yes.

To watch over stores? How many -- what I'm trying to get at is how many stores do they manage per regional manager and how many did you add? I'm trying to figure out whether or not you need to add any more headcount as you go into '08 or '09?

Sure. What we did -- this is actually going back to late 2006. We had a relatively small group. I think there were seven or eight regional managers that had on average over 10 stores and probably 12 or 13 stores on average and it was difficult. They had a very broad scope of responsibility. So what we wanted to do was we wanted to get them more focused on training and store support, so we made a significant investment and brought in some people and we hired -- promoted some people from within. So we took them down to an average of probably about five or six stores per regional, went on a very extensive training program with them. They had -- each one of them, as a result, had a much smaller geographical area to manage. They were able to spend much more time in the stores, visit them more frequently with an agenda.

And then as we opened throughout the year and they got more experienced in their new responsibilities and we were open and working in smaller geographic areas, it was easier for them to start to add on some additional stores. So I think now at this point, the average number of stores per regional is probably eight. They can probably go to 9, 10, some of them maybe even 11 depending on how brought their geographic area is. But we do have in our budget to add I believe two more this year, but that is relatively small in relation to our planned store growth.

And so we have been very pleased with the results of that program and we think that really it has a lot to do with -- it is one of the examples when we talk about -- all the operational improvements that we have made over the past year and how we think that that has more than offset the weakness, the macro weakness and enabled us to continue to achieve these types of results and I think that is just a good example of one of the operational improvements.

How often do you meet with that regional team that you have put in place now?

The way our structure is set is that we have a -- we have them in here three -- probably about three times a year for meetings, a number of days worth of meetings. We have a Senior VP of Store Operations who is traveling with them constantly. We have a VP of Store Operations who is traveling with them constantly and I get out as much as I can to travel with them. We also have a -- every Monday morning, we have a weekly operations call with them where it is them and all the department heads here in home office where we review business for the previous week and we review our priorities for the week and then each regional in turn has a call with their stores to review the priorities for the week and that has been a very effective communications tool for us and it has enabled us to -- again, another example would be one of the operational improvements that we have made -- it has given us the ability to execute much more efficiently.

Okay, that sounds good. Thanks.

Ladies and gentlemen, that will conclude the question-and-answer session for today. I would like to turn it back to management for concluding comments.

Thank you for joining us on today's call and for your interest in Lumber Liquidators. We look forward to speaking with you again very soon.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation and at this time, you may disconnect.