LL Flooring Holdings Inc (LL) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators third-quarter earnings conference call. With us today is Mr. Jeff Griffiths, CEO of Lumber Liquidators, and Mr. Dan Terrell, CFO from Lumber Liquidators.

As a reminder, ladies and gentlemen, this conference is being recorded. It may not be reproduced in whole or in part without permission from the Company.

I would like to introduce Caren Villarreal of Financial Dynamics. Please go ahead, ma'am.

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 on forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and 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. Information contained in this call 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 pleased to introduce Mr. Jeff Griffiths, President and CEO. Jeff, please go ahead.

Good morning, everyone. Thank you for joining us for Lumber Liquidators' third-quarter 2008 earnings call. With me on the call today is Dan Terrell, our CFO.

I'd like to begin today with a brief review of our third-quarter 2008 performance. Dan will then review our financial results in detail, as well as our outlook for the remainder of 2008. I will return with a few comments on our growth strategy and our outlook for the remainder of the year, before we open the call to questions.

We are pleased with our results for the third quarter, as we continue to build on our positive momentum and achieve strong sales and earnings despite the more challenging macroeconomic environment. Our solid performance is due primarily to the ongoing execution of our growth strategy, the operational improvements we've made to our business that are allowing us to be a more effective retailer, and our appealing value proposition of price, selection, quality and availability that continues to resonate with our customers. In fact, we found that our value proposition has become even more relevant in this difficult economic environment in which many consumers have become value seekers and are more price-conscious.

I'd now like to mention a few highlights of our third-quarter performance. We achieved a 20.6% increase in year-over-year net sales; comparable store sales growth of 2%, which includes positive comparable store sales growth among our mature store base and does reflect some impact from the more difficult economic environment; solid expansion in gross margin of 150 basis points, and an almost 50% increase in year-over-year net income.

We are encouraged by the strong results generated by both our new and mature stores. Our newly opened stores continue to contribute above plan and represented a large percentage of our total increase in sales for the quarter. Our new stores are ramping up more quickly than originally expected and are rapidly producing strong returns on the very low initial investment that they require. In line with the first half of the year, total sales reflect our enhanced merchandise selection, comprised of higher-quality premium products.

Specifically, we've continued to increase sales of moldings, trims, treads and risers, as we successfully promoted them as essential add-ons to new hardwood floors. Our enhanced selection of products also includes an expanded assortment of hand-scraped hardwoods, laminates, bamboos and exotics, all of which have experienced increased demand and also help to drive total sales.

The increased demand for higher-margin products contributed to our 150 basis points gross margin expansion over the third quarter of the prior year. Also contributing to the margin expansion was our continued pricing discipline, as well as our improvements in inventory allocation. It is also worth mentioning that we had fewer special liquidation buys this quarter than we did during the first two quarters of the year, and the sales of those buys had less impact on our third-quarter gross margin.

Though our increase in SG&A for the quarter reflects some higher professional fees and stock compensation expense versus the third quarter of last year, we are pleased with the continued progress we are making in aligning our operating costs with growth in our store base. That said, we will continue to make certain additional investments in infrastructure to support the expansion of the business.

For example, we recently strengthened our merchandising efforts focused on the liquidation deal cycle from purchase to complete sellthrough. This included the addition of a senior [buyer] with significant industry and product experience. Again, the investments in our infrastructure and improvements in our operations that we've made are enabling us to operate more efficiently and effectively while solidifying our foundation for long-term growth.

Given the difficult environment in which we are operating, we are more focused than ever on maximizing revenue opportunities and leveraging operating costs. Our focus on store operations has continued to include showroom modifications, associate training and improved in-stock positions that enhance both conversion and attachment.

In logistics, we've continued to improve the matching of inventory flow with consumer demand, which allows for greater on-time customer satisfaction at a lower cost. We are pleased with the success of all of our operational improvements, which we believe allow our customers to more fully benefit from our value proposition. Ultimately, we are improving customer satisfaction and strengthening our market position.

Before I turn the call over to Dan, I'd like to briefly touch on another way in which we are improving the customer experience through our recently expanded business partnership with The Home Service Store. HSS manages fully insured and licensed providers of professional installation services that measure, deliver and install flooring at competitive prices. As many of you know, we've carefully controlled the rollout of this program, and I'm pleased to announce that we now offer HSS installation services in almost every store in our chain. This partnership not only strengthens the full range of services offered to the customer but adds efficiency to our store operations as store managers spend less time on installation issues.

Importantly, the agreement with HSS allows us to market a full, start-to-finish product and services package to our customers and provide a more attractive and competitive offering by combining our hardwood flooring with reliable installation services. In particular, for those customers who may not be interested in a do-it-yourself home improvement project, we have now made it easier for them to shop with us. Further, by partnering with a national firm such as HSS, we can offer a consistent program and level of service at all of our stores. It's also important to note that this is a true partnership with HSS representatives present in our stores, usually on Saturdays, in tandem with Lumber Liquidators' own sales staff, which allows us to present customers with an integrated team that can assist them with all of their hardwood flooring needs.

I'd now like to turn the call to Dan. We'll be back in a few moments to discuss our ongoing strategy and answer questions.

Thank you, Jeff. Good morning to everyone. As Jeff mentioned, I'm going to provide some additional details on our results for the third quarter 2008, and then discuss our outlook for the year.

Net sales for the three months ended September 30, 2008 grew to $123.1 million from $102.1 million in last year's third quarter, an increase of 20.6%. Comparable store net sales increased 2% on top of an 8.4% increase in the third quarter of 2007. Our growth in comparable store net sales was primarily driven by increased volume, which we generally measure in square feet, partially offset by a decrease in the average retail price per square foot sold, resulting from changes in our sales mix. Consumer demand continues to be driven primarily by our expanded product assortment, particularly the premium products in each category, and our commitment to a more consistent in-stock position, including moldings and accessories.

Comparable store sales were impacted somewhat by the hurricanes in the Gulf region and the related flooding in the Midwest. Though a number of stores were closed from a few days to two weeks, all locations were re-opened by October, and we do not have any damage to our inventory or stores.

We opened 8 new stores during the third quarter of 2008, ending the quarter with 143 stores in 43 states. We opened 32 new stores in the 12 months from September 30, 2007 to September 30, 2008. Overall, our new stores are outperforming our expectations and continue to contribute significantly to our topline growth.

Gross margin increased 150 basis points to 35.3% from 33.8% in the prior-year period. This gross margin expansion continued to be primarily a result of the effective execution of initiatives in the areas of store operations, merchandising and logistics, where we maintained retail pricing discipline, broadened the selection of higher-margin premium products, and controlled total transportation costs. In addition, the completion of our filings for a retroactive rebate of a certain bamboo tariff added 40 basis points to gross margin.

Special liquidation deals, which had contributed to gross margin expansion in the first half of the year, had less impact in the third quarter. However, the strengthening of our merchandising efforts focused on liquidation product added approximately 15 basis points to the third quarter of 2008 gross margin in comparison to 2007.

Selling, general and administrative expenses were $34.6 million or 28.1% of net sales for the third quarter of 2008, compared to $28.3 million or 27.7% of net sales for the third quarter of 2007, as total leverage of advertising, labor costs and occupancy expenses were more than offset by increases in certain other expenses, including legal and professional fees and stock compensation expenses.

Advertising expenses as a percentage of net sales were 9.7% in the third quarter of 2008, down from 10.2% in the prior-year third quarter, primarily due to the leverage of national campaigns over a larger store base and partially offset by increased spending on direct sales generation programs and local advertising.

Labor costs at 10.1% of net sales for the third quarter of 2008 were slightly higher than the 10% for the 2007 third quarter, primarily due to increases in certain bonus accrual and employee benefits. While occupancy costs at 3.1% of net sales, down from 3.3% in 2007, were leveraged over the greater sales of a maturing store base.

Certain other expenses increased $1.6 million, or 70 basis points, primarily due to increases in legal and professional fees of operating as a public company in 2008, and the legal fees incurred with regard to the variable plan.

Net interest and other income for the third quarter of 2008 was $220,000 and was primarily tax-exempt interest income from invested cash. In the third quarter of 2007, net interest and other expense was $184,000 and was primarily interest expense on bank debt outstanding prior to our IPO.

Net income for the third quarter of 2008 increased 47.6% to $5.5 million, or $0.20 per diluted share, based on approximately 27.3 million weighted average diluted shares outstanding. In the third quarter of 2007, net income was $3.7 million, or $0.16 per diluted share, based on approximately 23.2 million weighted average diluted shares outstanding.

Turning now to our balance sheet and cash flow, we had $24.8 million in total cash and cash equivalents at September 30, 2008, up from $22.3 million at June 30, 2008, and we remained free of long-term debt. Merchandise inventories totaled $96.5 million at the end of the third quarter, down from $100 million at June 30, 2008 and up from $74.9 million at September 30, 2007. Available-for-sale inventory, which are products we have received and inspected at either our central distribution center or at a store location, totaled $86.4 million at September 30, 2008, $85.3 million at June 30, 2008, and $66.8 million at September 30, 2007.

Although our merchandising strategy in 2008 has included carrying a greater level of both liquidation deal merchandise and moldings and accessories in comparison to 2007, our available inventory per store was basically equivalent in comparing September 30, 2008 and 2007. Strengthened forecasting and planning by our merchants resulted in lower available inventory per store in comparison to June 30, 2008.

Working capital was $91.3 million at September 30, 2008 with a current ratio of 3.4 times, up from $86.1 million and 2.95 times at June 30, 2008 and $76.8 million and 3.12 times at December 30, 2007.

Capital expenditures totaled approximately $2 million for the third quarter of 2008 and $6 million for the nine months then ended. Capital expenditures in the third quarter of 2008 were primarily for new store fixtures and leasehold improvements, but also included $800,000 for the acquisitions of 1-800-hardwood for use in our marketing and branding campaigns.

Turning to our outlook for the full year 2008, we are narrowing our full-year sales guidance to a range of $482 million to $486 million from our previously expected range of $480 million to $490 million. We now expect comparable store sales to increase in the low single digit range.

We have now opened 34 new locations in 2008, reaching our goal for the year of 150 total stores in operation. However, we anticipate possibly opening one or two additional locations in 2008. Finally, we are narrowing our full-year 2008 EPS range to $0.74 to $0.77 per diluted share, from our previous range of $0.73 to $0.78 per diluted share.

I'd now like to turn the call back over to Jeff for his closing remarks.

Thanks, Dan. I'd now like to take a few moments to update you on our store openings and outlook.

As we mentioned in today's press release, we've achieved our store opening goal with 34 new stores in 2008. As Dan noted, there's a possibility we may open one or two more stores this year. We are pleased to have achieved our store opening goal as planned in our first year as a public company.

We've been very encouraged by the rapid ramp-up of our new stores and their ability to quickly recover startup costs. Moreover, we are achieving success with our new stores across geographies, which we believe is largely due to our strong brand recognition and effective nationwide advertising campaign. We opened five stores in new markets and three stores in existing markets for a total of eight new stores opened in the third quarter. As we've mentioned previously, our current store opening plan calls for about half of our stores to be opened in new markets and half to be opened in existing markets. When we open new stores in existing markets, we tend to focus on large metropolitan areas that can support several stores, and have found that our total returns in a specific market tend to be greater as we open more stores.

We believe that our store expansion strategy will enable us to take additional market share in the highly fragmented market in which we operate. As you may know, our current goal is to expand our still relatively small store base by 30 to 40 new locations in each of the next few years. Our infrastructure investments and store model continue to allow for this growth, as our stores become profitable quickly with a relatively low capital investment. However, we remain prudent in our approach to expansion, in light of the current macroeconomic challenges.

We are encouraged by our performance through the first nine months of 2008. However, as we look forward, we are certainly aware of the challenges that we face, given the turmoil in the financial and credit markets and its impact on consumers. We are mindful of weakened consumer trends, and though we believe we offer the best value proposition to consumers, we are not completely immune from the effects of the current headwinds.

With that said, we are cautiously optimistic that the positive traction we are experiencing within our business will continue through the fourth quarter. Further, as we noted in our release, we are confident our debt-free balance sheet, cash-positive and flexible store model, and strong infrastructure will enable us to navigate the current macroeconomic environment and continue to implement our growth strategy.

Long-term, we remain confident in our strong prospects for growth. As I've mentioned, our appealing value proposition of price, selection, quality and availability continues to resonate with our customers and is even more important in this difficult economic environment in which many consumers have become value seekers and are more price-conscious.

In addition, we continue to operate in a fragmented market with a significant number of independent retailers. We believe this, along with our still-small store base, provides us with ample opportunity for continued growth.

As we move forward, we will remain focused on achieving sales growth and margin expansion, maintaining and broadening our effective brand marketing strategies, and continuing to add successful new stores to our chain. All of this will help us to extend our leadership position as the largest specialty retailer of hardwood flooring in the US.

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

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). Matthew Fassler, Goldman Sachs.

Actually Robert Higginbotham in for Matt.

Could you talk a little bit about the trajectory of sales performance you saw in the third quarter as trends may have changed from the beginning to the end, and what you're seeing so far in the fourth quarter? It sounds as if, based on some of the comments you made pointing to your guidance, that maybe you've actually haven't seen a big falloff in sales but are kind of bracing yourself for that, and maybe you could help us understand that? Thanks.

You know, sales were pretty consistent, the first two months of the quarter. It slowed a bit in early September and then were very strong the end of September. October was a challenging month, but certainly we had some strengths there. So I think the main thing is that we are being cautiously optimistic, given the more general environment.

Okay. The weakness you have seen, in terms of the challenging October, is that coming in the form of mainly volume, as you put it, or is that a price per foot in terms of people trading down? How has that been reflected in what you've seen?

I think customers are certainly been very value-conscious. I think that's certainly works to our strategy and our product mix.

I got you. One more question on inventory -- the available per-sale inventory, inventory per store as Dan alluded to, was kind of flattish. The in-transit type inventory I believe accelerated a bit in terms of your growth from last quarter. Could you help us understand that, and maybe could put it in different terms? You know, when should we expect I guess to kind of see inventory growth come a little bit more in line with sales growth?

Robert, we are pleased with the direction that we went in during the third quarter, and we did lower the available inventory per store from June to September. That was the same trend that was in 2007.

We are probably more pleased with the mix of inventory that's at the stores because we are carrying a higher level of liquidation deal inventory and a higher level of moldings and accessories, by plan. That said, we believe that we're going to continue to make some improvements in our planning and forecasting in Q4, such that we will be able to drop that inventory per location, at least the available inventory per location.

The [on-the-water] inventory is always going to be a timing issue. It will certainly vary with the ebb and flow of the overall inventory, but that's still going to be subject to the timings around the end of a quarter.

Great. Thanks, guys.

Rick Nelson, Stephens Inc.

Good morning and congratulations. Can you talk about the economics of the installation business, and also what your rollout plans are for that?

The main thing with the installation business is we want to make sure that the customer has as good a value from installation as they do from the flooring that they buy from us. So our focus there is to keep those prices as low as possible.

We started a test very early this year with [them] and it was a very well-managed rollout, so it gave us the opportunity to work together in a small number of stores and get to understand what worked well. It also gave installers that we've had a long-term relationship with an opportunity to join and participate in the program, and so it was -- that was actually something we've done over the last nine, ten months.

And that rollout plan of that business?

Well, it's in substantially all the stores now. Our expectation is it will be in -- should be in all new stores that we open going forward.

I got you. Cannibalization in the quarter, is there a way to quantify that, what you experienced in existing markets with new stores?

I'm sorry, we had trouble hearing you.

Can you quantify the cannibalization -- sales cannibalization that you experienced in the quarter where you opened new stores in existing markets, how that impacted the comps?

Is it not a number that we usually disclose, and it's not a number we're going to get in the habit of disclosing. We certainly have cannibalization when we open in new markets, but it's not a number we're going to put out there.

I think that the thing to keep in mind is that we underserve all major metropolitan areas. We just simply do not have enough stores to support these markets, the potential sales in these markets. It's unreasonable to expect customers to drive an hour-plus from one end of the market to the other to visit the store, especially when they are usually making multiple visits before they finalize their purchase.

So, because of our well-known brand and the long-term marketing that we do, our name is very well known, our value proposition is well known. So when we open a second or third store in these markets, these stores just ramp very quickly. When we look at the total return that we get from the combined stores in the market, it is significantly better than the return we were getting from the single store. But it is going to have a cannibalization impact, and we've known that all along and we think that's the best thing for the business long-term.

Thank you. Could you also speak to regional areas of strength and weakness?

Again, we don't really see any significant change from one region to the other. Because our store base is so low in any given market, I don't think that we are impacted as much as retailers that have a much larger number of stores.

Would that be true in the housing-affected areas, you know, Florida and California?

You know, our performance in those markets is pretty consistent with what we see in the rest of the chain. There's not that much of a difference.

How about the availability of closeouts? Do you see more of that as the macroeconomic environment has grown more difficult?

There's been a pretty consistent, high level of availability this year in special deals and closeouts. We expect that to continue. We think we are in a great position to maximize our business with that and take full advantage of it, so we see that actually as a plus for our business.

Great, thank you.

(Operator Instructions)

Okay, well, we'd like to 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.

Thank you. Ladies and gentlemen, that does include the Lumber Liquidators third-quarter earnings conference call. We thank you again for your participation today, and you may now disconnect. Thank you.