LL Flooring Holdings Inc (LL) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to today's Lumber Liquidators fourth quarter and year-end conference. With us today is Mr. Jeff Griffiths, CEO of Lumber Liquidators, and Dan Terrell, CFO of Lumber Liquidators. As a reminder, ladies and gentlemen, today's conference is being recorded and may not be reproduced in whole or in part without permission from the Company.

At this time, I would like to introduce Ms. Leigh Parrish of FD. Please go ahead.

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's 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 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. And now, I'm pleased to turn the call over to Mr. Jeff Griffiths, President and CEO. Jeff?

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

I'd like to begin today with some highlights of this past year's performance. Dan will then review our financial results in detail as well as our outlook for 2009. I'll return with comments on our ongoing strategic direction and our plans for the remainder of the year before we open the call to questions.

Overall, we are very pleased with our performance for 2008, our first full year as a publicly traded company. We are particularly gratified with our results in light of the very difficult macro environment which as we all know began to deteriorate rapidly in the fourth quarter. Despite these external challenges, the Company's performance met our expectations for the year as we expanded our gross margin and leveraged our operating expenses.

We successfully demonstrated that our business model is flexible and resilient, and we've ended the year solidly positioned to continue to grow and expand our marketshare as well as drive earnings growth in 2009. Much of our success last year was due to our ability to grow our store base and expand our market share at a relatively low cost. In 2008, we added 34 new stores to our base which was in line with our expectations and we ended the year with 150 stores across an expanded national footprint. These new stores consistently performed above expectations and made significant contributions to our sales growth for the year.

Helping to drive the solid performance and quick ramp up of our new stores was our well-known brand and unique value proposition, both of which are supported by our strong national advertising program. This high brand recognition and acceptance of our offering, combined with our low start-up costs, enabled us to gain significant market share in 2008 and to take advantage of the expansion opportunities presented by the highly fragmented hardwood flooring industry in which we operate. We intend to continue to grow our store base and capture additional marketshare in 2009, even in light of challenging external factors and will continue to maximize the strategic opportunities for growth that we identified at the time of our initial public offering.

Before I touch on our growth strategy, I would like to discuss the other important drivers of our success in 2008. Our unique value proposition of price, quality, selection and availability, has been and continues to be one of our key contributors to our strong performance. In 2008, we saw greater acceptance for our value proposition, as well as an expansion of our customer base as demand for our offering grew.

As consumers became more price and value conscious during the latter part of the year, we quickly adjusted our marketing strategies to address their shifts in attitude. We moved from branding to call-to-action messages and specifically focused on our value proposition. Notably, we were able to shift a significant amount of marketing dollars to this call-to-action strategy in a relatively short time period, allowing us to keep pace with the rapidly changing atmosphere and generate sales without negatively impacting margin.

Our gross margin continued to benefit over the course of the year from our expanded product selection and increase in stock position of premium products. Margin expansion was also driven by increased sales of high margin items such as moldings, trims, treads and risers. In addition during the year, we continued to take advantage of opportunistic liquidation purchases. Our solid cash position puts us in a great position, allowing us to act quickly when these opportunities arise. We believe that these liquidation opportunities will continue to occur during this difficult economic time.

Another important driver of our success throughout the year was our ability to improve operational efficiencies and strengthen our infrastructure. We made several advancements on these fronts by adding support at the store and regional management levels, upgrading our merchandising processes in the areas of inventory and product allocation and improving the quality of our in-store product presentations. Our improvements in product planning and forecasting enabled us to ship more deliveries to intermodal and more cost efficient carriers without reducing our frequency of deliveries to our stores. As a result, we were able to contain the increases related to fuel costs by reducing the amount of miles traveled.

The improvements in planning and forecasting also led to more consistent in-stock positions of our core flooring SKUs. One of the resulting benefits is that we are able to continue to reduce the number of days outstanding for open orders, which we believe leads to greater customer satisfaction and continues to strengthen our competitive position. This is a good example of how our investments in infrastructure continue to yield benefits, enable us to further improve our execution.

In addition to all of these important advancements, we believe that there are more opportunities to create further operational efficiencies as we continue to position the Company for long-term growth and expansion. I will discuss these in greater detail later in the call.

Before I turn the call over to Dan, I would just like to say that we are very pleased with all of our achievements for the year and encouraged by our performance, especially against the backdrop of a challenging economic environment. It's a testament to our entire team and their hard work over the past year, as we have established a strong foundation and put the right pieces in place to support our long-term growth strategy. We remain confident in the attractiveness of our unique value proposition and in our ability to execute our low cost store expansion strategy.

As we leverage these important aspects of our business model, we expect to continue our positive momentum, capture additional market share, and build on our leadership position as the largest special retailer of hardwood flooring in the US. I will now turn the call over to Dan for a detailed review of our financial results and will be back in a few moments to discuss some of our strategic initiatives for 2009 as well as answer questions.

Thank you, Jeff. Good morning, everyone. I'm going to provide some additional details on our results for the fourth quarter and full-year 2008, and then discuss our outlook for the year. I'll start with our results for the fourth quarter.

Net sales for the three months ended December 31st, 2008, grew to $116.5 million, an increase of 10.4% from $105.5 million for the fourth quarter of 2007, due to growth in our store base. Comparable store net sales decreased 4.6% for the fourth quarter of 2008, compared to an increase of 8.6% in the fourth quarter of 2007. Comparable store net sales in the fourth quarter were impacted by the rapid deterioration in the general economy, though our monthly comparable store net sales improved as the quarter progressed, largely due to the adjustment in our marketing strategy Jeff previously mentioned, accommodating the increased price sensitivity of our customers. We believe our retail prices present the greatest value relative to our competitors in the premium products of each product line. And throughout 2008, our expanded assortment of premium products captured a greater percentage of our sales mix.

In the fourth quarter of 2008, we saw an acceleration of this trend particularly in our laminate, bamboo and cork proprietary brands. Even the premium products within these product lines carry a retail price point lower than our average and as such, the average retail price per unit sold declined approximately 9% during the fourth quarter, while our total sales volume which we primarily measure in square feet, grew approximately 21%. We opened seven new stores during the fourth quarter, and 34 stores in total for 2008, ending the year with 150 stores operating in 44 states.

Overall, we were pleased with the fourth quarter performance of our new stores, given the challenging environment. And we expect expansion of the store base to continue to be the primary driver of sales growth in the near term. Gross margin increased 30 basis points to 34.2% from 33.9% in the prior year period. This gross margin expansion was primarily due to the shift in sales mix toward premium products within certain product lines, and strong sales of moldings and accessories, partially offset by higher transportation costs in comparison to the fourth quarter of 2007.

Selling, general and administrative expenses in the fourth quarter of both 2008 and 2009 were significantly impacted by stock-based compensation expense. SG&A in the fourth quarter of 2008 included a benefit of $3 million, resulting from reversal of a stock-based compensation expense accrual related to the variable plan, originally accrued in the fourth quarter of 2007. We discussed this reversal and the details of the variable plan in our 10-K which we filed this morning.

In addition, SG&A expense in the fourth quarter of 2007 included $1.2 million related primarily to the accelerated vesting of certain stock options and the recognition of certain restricted stock units, triggered by the IPO. Excluding all stock-based compensation expense from SG&A, expenses were 26.6% of net sales for the fourth quarter of 2008, compared to 27.3% of net sales for the fourth quarter of 2007. This improvement was primarily driven by a decrease in professional fees and the leverage of national advertising over a larger store base. We were pleased that our strength in infrastructure enabled us to control certain SG&A expenses without adverse impact to sales or operations, including the flexibility in advertising mentioned earlier.

Net interest and other income for the fourth quarter of 2008 was $215,000 versus $132,000 in the same period of 2007. The effective tax rate was 42.3% in the fourth quarter of 2008, up from 39.5% in the fourth quarter of 2007. This increase was primarily due to certain state income taxes and adjustments to certain full-year estimates.

Net income for the fourth quarter of 2008 was $6.5 million or $0.24 per diluted share, based on approximately $27 million weighted average diluted shares outstanding. The fourth quarter reversal of the variable plan accrual increased diluted earnings per share by $0.07. In the fourth quarter of 2007, net income was $3 million or $0.12 per diluted share, based on approximately 25.3 million weighted average diluted shares.

I'd now like to discuss our results for the full year which were in line with our guidance for net sales, comparable store sales growth and diluted earnings per share. Net sales for the year ended December 31st, 2008 grew 19% to $482.2 million from $405.3 million for 2007. Comparable store net sales for the year grew 1.6% on top of an 8.6% increase in 2007.

Consumer demand for our expanded product assortment, primarily certain premium products, drove sales volume, partially offset by a slight increase in the average retail per units sold as a result of changes in our sales mix. In addition, sales benefited throughout the year from our commitment to a more consistent in-stock position including moldings and accessories, and our merchandising investment in liquidation deals including certain special liquidation buys in the first half of 2008.

Gross margin for 2008 increased 150 basis points to 34.8% from 33.3% for 2007. This expansion included approximately 35 to 45 basis points related to items we would regard as non-recurring or unique, including the retroactive rebate of a portion of a bamboo tariff and the impact of certain special liquidation buys. That said, we were pleased with the success of store operations, merchandising and logistics initiatives where we maintained retail pricing discipline, strengthened controls related to our purchase cycle, broadened our product assortment and controlled transportation costs. We expect these benefits to continue in 2009 and result and in gradual expansion of gross margin.

SG&A expenses for the full-year 2008 were $130.7 million or 27.1% of sales, compared to $116.3 million or 28.7% of sales in 2007. As I mentioned earlier, SG&A expenses in both 2008 and 2007 have been significantly impacted by stock-based compensation expense, particularly related to the variable plan and our IPO. We fully describe these impacts in our 10-K.

Excluding all stock-based compensation expense, SG&A expenses were 27.1% of net sales in 2008, compared to 27.2% of net sales in 2007. This improvement primarily resulted from leveraging our national advertising, partially offset by increases in legal and professional fees in our first full year as a public company, and an increase in certain labor costs primarily due to our infrastructure investment. We had income of $807,000 related to interest and other items in 2008, compared to net expense of $309,000 in 2007. The effective tax rate for 2008 was 41.4%, up from 38.8% for 2007, and included the impact of the non-deductible portion of the variable plan's cumulative compensation costs. Excluding this impact, the effective tax rate was 39.7% for 2008, compared to 38.8% in 2007, largely due to increases in certain state income taxes.

Net income for 2008 was $22.1 million or $0.82 per diluted share, based on approximately 27.1 million shares. Net income for 2007 was $11.3 million or $0.48 per diluted share, based on approximately 23.6 million shares. Again, the 2008 earnings per share included the aforementioned impacts from the variable plan, a benefit of $0.07 per diluted share, partially offset by $0.03 per diluted share of increased tax expense in the first quarter due to the non-deductible cumulative compensation costs of the variable plan.

Turning now to our balance sheet and cash flow, we ended the year in a solid cash position with $35.1 million in total cash and cash equivalents, up from $24.8 million at September 30th, 2008 and $33.2 million at December 31st, 2007. We remained free of long-term debt and we did not draw on our $25 million revolver during 2008. Merchandise inventories totaled $88.7 million at the end of the fourth quarter, down from $96.5 million at September 30th, 2008, and up from $72 million at December 31st, 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 $75.5 million at December 31st, 2008, $86.4 million at September 30, 2008 and $60.3 million at December 31st, 2007. Our merchandising strategy throughout 2008 included greater carrying levels of liquidation deal merchandise, as well as broadened and more consistent in-stock positions of moldings and accessories.. We are pleased that by strengthening merchandising efforts throughout the purchasing cycle, we were able to achieve these goals and reduce available inventory per store to $503,000 at the end of 2008 from $520,000 per store at the end of 2007.

Working capital was $96.2 million at year end, with the current ratio of 3.6 times. This compares with working capital of $77.9 million at year-end 2007, with the current ratio of 3.2 times. Capital expenditures totaled approximately $7.4 million for 2008, including $800,000 related to the purchase of 1-800-hardwood. This compared to $6 million for 2007.

Before I turn the call over to Jeff for a discussion of our overall 2009 priorities, I will provide our financial guidance for the year. Overall, we expect the economic pressures on the wood flooring market to continue through 2009 and as a result, our sales growth will be through the expansion of our store base. Even in these challenging economic times, we believe the flexibility and profitability of our store model will allow us to continue to capture marketshare, as well as expand our cash position and increase net income exclusive of the variable plan benefit we recorded in 2008.

We expect to generate total sales of $515 million to $530 million in 2009, which reflects our plan to open 30 to 36 new store locations and our expectation of a comparable store sales decrease in the low to mid single-digit range for the year, with slightly easier comparisons in the latter half of the year. We expect 2009 full-year earnings per diluted share in the range of $0.76 to $0.86 on approximately 27.5 million shares. Adjusted for the variable plan accrual reversal and tax expense for non deductible cumulative compensation cost expense, achieving the midpoint of this range would result in year-over-year earnings growth of approximately 6%.

We expect capital expenditures in the range of $10 million to $13 million in 2009, as we continue to invest in new store openings, remodel existing stores, and seek logistics and information technology solutions to optimize our product flow and enhance management control, reporting and planning. We expect to be cash flow positive in 2009, and remain free of long-term debt. 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 some of our strategic growth initiatives for 2009 which will help us achieve our goals of expanding our marketshare and earnings during the year. As we both said, in 2009 we expect to continue with the expansion of our store base, and capitalize on opportunities to leverage our proven store model with the relatively minimal upfront expenditure. This is in keeping with our long-term goal of opening 30 to 40 stores per year. While we are certainly cognizant of the ongoing challenges presented by the downward shift in the economy, we are fortunate to have a flexible store opening model as well as significant financial flexibility which enable us to sustain our expansion strategy.

In addition to our store expansion strategy, we are implementing several strategic initiatives that we expect will help us to drive additional growth this year and over the long term. First, as we outlined last quarter, we have developed an important business partnership with the Home Service Store or HSS in which we now offer fully insured HSS installation services in every store in our chain. Our addition of HSS installation services has proven to be a strong selling tool as it strengthens the full range of services that we offer and raises the total level of customer satisfaction.

Second, as Dan mentioned, we will be making some additional investments in our software and systems, so that we can increase the discipline and efficiency with which we manage operations throughout our organization. In particular, the upgrade is intended to optimize our warehouse and distribution systems and assist us with managing our inventory. While we have budgeted for some up-front costs associated with this advancement, we believe that the long-term benefits of better and more efficient operations outweigh the additional incremental cost.

Third, we are piloting a program under which we will have products shipped directly from China. While this direct-to-store delivery program is only in its early stages, long-term we believe this program when rolled out across all stores over time, will allow us to make further significant improvements by reducing time in transit and improving inventory in-stock positions while lowering transportation costs.

Lastly, related to our inventory management, we expect to strengthen our product allocation function by adding additional resources and management expertise in this area. Our intention in doing so is to create systems that will further improve inventory management and reduce unnecessary interstore transfers. An important component of our enhanced inventory management will be to begin customizing our product assortments by region so that our in-store assortments better reflect local customer preferences.

In summary we look forward to a productive 2009 in which we plan to extend our market share and drive earnings growth. We will continue to take advantage of our ability to expand our store base, with minimal up front expenditure and expand our share in a highly fragmented market in which we operate. We are confident that we well benefit from additional operational efficiencies and will be able to continue to expand our operating margin. Lastly, we look forward to beginning the implementation of the strategic initiatives that I just described to further enhance our business and drive additional growth. We look forward to providing you with updates on our progress throughout the year. We would now like to answer any questions that you may have. Operator?

Thank you. (Operator Instructions). We'll pause for just a moment. We'll go first to Rick Nelson.

Thank you. Good morning. Great quarter.

Thank you.

Jeff, you mentioned that sales improved as the quarter progressed. Can you provide more color as to the magnitude? And any insight into January, February, first quarter would be helpful. Thank you.

We did -- as we said, we made some adjustments in our marketing strategy where we moved some dollars from some branding messages to some calls-for-action messages. And we did see some improvement in sales as we got later in the quarter. What we've seen this year so far is consistent with what we said in that, we expect negative comp store sales this year and we expect them to get a bit better as we get later in the year, as we get up against easier comparisons.

I think you mentioned that average ticket was down 9%. Was that on a same-store basis?

The average ticket, Rick, was down about 3% to 4%. The average retail price per unit sold was down 9%, and that was primarily due to the shift in the sales mix. Those premium products in categories such as laminates, bamboo and cork carry an average retail price that's lower than the Company's average. That took down the average retail price per unit sold.

How about store traffic or number of transactions, do you have that data?

We're not presenting that.

Got you. How about regional strengths and weaknesses, particularly some of the housing affected markets like Florida and California, if you could comment on sales there relative to the rest of the country?

Our store base in any given market is still pretty small, so we don't really -- and because we're a young business, we feel like -- that a lot of the operational improvements that we are making probably clouds the performance in any given market, between that and the small store base.

And then the store growth --

Mr. Nelson, pardon the interruption. We do ask that you please pick up the handset prior to posing your next question if you are on a speaker phone.

I'm on a cell phone, actually.

Okay. Please go ahead.

Thank you. Store growth that you're planning for 2009, is that -- can you break that down between existing markets and new markets, and what you're seeing in rents versus what you were paying previously? Is there opportunities to renegotiate some of your existing rents?

We're sticking to our long-term strategy of roughly half of the stores -- half the new stores being in new markets and half in existing markets. We do believe that we're starting to see some opportunities and some occupancy cost as we're looking at locations. We are balancing that versus maybe paying about the same cost, but upgrading the location a little bit. But that's pretty much a case-by-case basis. And I'm sorry, what was the other part of your question?

Existing markets versus new markets.

Certainly. As leases come up for renewal, we are certainly using that opportunity to aggressively look for some concessions there.

Rick, I would just add that occupancy costs are not a large percentage of our SG&A expense, based on the type of location we're in. Even though we're aggressively pursuing cost benefit there -- we are throughout the whole SG&A structure. But occupancy as they come up for renewal and certainly on the new stores, but it's just not going to have the same impact as you might see from other retailers who are going through the same strategy.

And then are the new stores, are they going primarily into existing markets or are these new markets? What do you expect in terms of cannibalization or what have you seen of late?

We're sticking with the long-term strategy that about half will be new and half will be existing markets. Cannibalization is consistent with what we've seen previously.

Thank you very much and good luck.

Thank you.

We'll go next to Gregory [Milch].

Thank, guys. A couple questions. In your guidance on the low single-digits, mid single-digit negative comps, what are you assuming will happen to the ticket and average revenue per unit numbers you talked about? And then I had a follow-up.

We feel that the trend we saw last year with that slight decline will probably continue or maybe start to stabilize a bit. We're still seeing a shift to more business in laminate and bamboo, cork, which is a lower sales per square foot. But we're offsetting that to some degree by selling more premium products in those categories and those premium products carry higher gross margins than our average gross margin. While we are seeing a slight decline in the average ticket, we're seeing improvement in margin. We're also continuing to get more molding and accessory sales, which, again, helps offset that.

And could you -- did you quantify or could you quantify what currency did to gross margin, just given the importing versus your selling here and what you think that is into '09?

Greg, we don't break that out separately as a component. Certainly, it began to have a benefit in the fourth quarter as it worked its way through the inventory turn. We expect it to have some benefit in the -- at least through the first half of '09 but we haven't quantified it.

You don't try to hedge any of that, it just is what it is.

Right. Everything we purchase is in dollars but we have no hedging program.

Okay. Great. And then just -- the last is a follow-up. I think earlier there was a question on what trends you had seen quarter-to-date in early '09 and I can't remember if you answered or not or I might have missed it. Was there any comments on what you're seeing so far the last month or two?

Pretty similar to what we saw in the fourth quarter, in terms of the product mix trending towards the lower priced laminates, bamboos and corks which again, helps the margin and reduces the average ticket.

The improvement in comps for the quarter sounds like it didn't continue to improve into this year, but it didn't go turn around, is that -- ?

Fair assumption.

Okay. Thanks.

Mitch Kaiser has our next question. Please go ahead, sir.

Good morning, guys. It's actually Peter Keith calling in for Mitch. Just a couple questions for you. Was wondering how we should think about gross margin at least for the first half of the year because it would seem to us that you will begin to get some benefit from your transportation from the lower fuel cost. But at the same time, you're going to be going up against some of the nice margin drivers you saw from the opportunistic buys in the first half of last year. Would we think that gross margin is going to be flat or do you think you can still see some improvement in the first half of the year?

Our assumption is that we will see some improvement in margin with the product because of all the improvements we've seen in the product mix that we've already discussed. We also -- with the logistics initiatives that we're doing with the reduction in fuel costs, certainly they will benefit it as well. We do think that the logistics benefits are more -- will be more dramatic in the latter part of the year.

As far as liquidation buys, there were some significant liquidation buys early part of the year last year. But we feel we will continue to be able to take advantage of those as we go through the year. There's still quite a bit of product available. We also had the one-off in the mid-year last year with the bamboo rebate. But overall, we think that the combination of the product shift and the logistics initiatives, we're going to continue to see margin growth.

Okay. That's helpful. Turning to SG&A and Jeff, I appreciate the strategy that you outlined for us. Would we expect that those four initiatives will be margin dilutive in 2009 or will you begin to see some benefit that might offset the ramp-up in cost?

Overall, we think that the combination of all this will probably -- our belief is that we will see some SG&A improvement in 2009. We still have the benefit of managing our marketing spend and there's some flexibility in there that should help that. A lot of the investment spending that we're doing is going to be spread out over a long period of time so it's not going to be all impacted in 2009. And again, that's going to be offset by the -- by a lot of the improvements in logistics, which will be seen in gross margin improvement.

Thank you. One last question. Just thinking longer term about your business, I believe you stated an operating margin goal of about 8% as a target. It would seem even though it was a tough environment, you still are beginning to approach that here at the end of 2008. And understanding that economic and topline environment is going to remain challenging, but have you reestablished a new goal or do you have some new thinking around that?

We haven't specifically said anything beyond that, but our feeling is that long-term there's an opportunity to be better than that. Certainly as we went through the round of operational improvements in 2008, and we did see margin improvement, we're still not done. We still have more opportunities, as part of what we outlined in the strategy for this year. I think as we accomplish those improvements that we'll be able to see more behind that.

Certainly, the whole way we manage the inventory, the allocation process, the distribution process, significant improvements -- opportunities for improvement there over the next few years. And I think that as we do that, and we improve the in-stock position and we improve the level of training in the stores and things like that, that there will be a sales benefit on top of that which, again, will drive further margin improvement. I think they'll just build on each other. We've still got several years of improvement opportunities here.

Okay. Thanks for the color and good luck.

Thank you.

Thanks.

We'll move on to Brad Thomas.

Good morning. This is actually Joe Hill in for Brad Thomas. Just had a couple questions. I know you've mentioned something about some of the following, but could you talk a little more about the timing of the store openings you have planned? And from a more strategic standpoint, could you also talk about how you're thinking about store openings in this difficult consumer environment?

For example, if we continue to see the consumer weaken, would that be a circumstance where we might see stores come in at the lower end of the range or would that be a situation where you might be a little more opportunistic and accelerate store growth? It's obvious that the economics on your new stores are very strong so it would be very helpful for us to understand how you all are thinking about store openings.

I think the store opening plan is fairly even throughout the year in terms of number of stores per month or per quarter. But the most important thing to come away here is that we have a pretty short lead time for opening, so we can make adjustments in this strategy very quickly if we feel that the situation is deteriorating, and so we're just constantly reviewing that. I will say that our new store performance continues to be very strong.

New store productivity is exceptional. As long as those trends continue to be very positive, we feel that it's in our best long-term interest to continue to open stores because as those stores get established in their market and the economy does start to turn around, we should be in a great position to really drive our growth much faster than we're driving it now. It's something that we are constantly reviewing and can make adjustments very quickly if necessary.

Okay. Great. I also just had a follow-up question on the supply chain and distribution. I know you disclosed in your 10-K that you expect the facility to support planned growth over at least the next three years. But could you just give us an update on how close to full capacity to what you maybe have right now? How much remaining capacity -- the facility could have and what timing you might have in mind for additional investments.

We are making some improvements in this facility this year which is part of our capital expenditure. We are going to triple the number of locations available for flooring. As we get better at managing the inventory, we're carrying less -- our goal is to carry less square foot amount per SKU, but have a higher in stock level which necessitates more locations but doesn't necessarily require more square footage.

We feel that by making these investments, we're going to be able to prolong the life of this facility which would preclude us from having to get another facility. But again, that's something that we are constantly re-evaluating as well. When we do get to the point -- and also the China consolidation, which is a lease operation, will help prolong the life of this facility as well. When we do get to the point where we think we need some more capacity, it's a relatively low investment, not a lot of technology that goes into warehousing wood. It would be relatively low expense to bring on additional locations but again, I don't see that necessary in the foreseeable future.

Okay. Thanks for your time and good luck.

Thank you.

Robert Higginbotham, please go ahead.

Thanks. Good morning, guys. Couple questions around cost and the first on the ad expense line, Jeff. Just a minute ago, you mentioned your ability to really flex your spending amount there and you certainly demonstrated that this quarter. As you look forward into 2009, how should we think about how you're going to manage that expense? Would it be a certain percent of sales? In other words, would you still be targeting the same 40 basis range leverage that you had looked to achieve in a more favorable environment?

Our -- we're pretty much staying by the long-term strategy of a target of 40 basis points per year improvement in marketing spend. Some years, it's going to be greater than others. I think there were some benefits last year with some -- particularly later in the year, where cost-of-paid search went down. There was some savings in some other areas that we were able to take advantage of.

We don't feel like we cut back on our advertising at all. We think that we just got more efficient with it and took advantage of some cost savings opportunities. We have not built into our assumptions this year that we're going to continue to get those cost savings, but our feeling is that there's a possibility that some of those will continue.

Understood. And the second part of the question around cost was on payroll, which was essentially neutral as a percent of sales year-over-year. And now certainly much of that is commissions which is going to automatically flex with sales, but could you talk a little bit about the level of service in your stores? And how that might have changed and how much flexibility might have to change that?

We feel that we've made a lot of improvements at the level of service in the stores, which we've -- not that it's been a significant improvement in headcount. But that there's been in this environment an opportunity to upgrade the quality of the staff. We've made investment in training which certainly is paying some dividends there. And the other piece of it is continued investment in infrastructure here in the home office.

Just to give you an example of how that spend has helped, where -- if you look at some of the significant improvements in gross margin that we had in 2008, a lot of it came from the fact that we invested in some additional staffing in our merchandising and product allocation departments. As a result of that, we were able to better manage our buying, improve our in stock positions. That was an investment in payroll that gave us an improvement in gross margin. When we see opportunities like that, that if we think we can make some additional investment in staffing and we're going to get benefits either in cost savings in other areas or improvements in gross margins, we're going to continue to make those investments.

Sure. On the store level, focus on that for a moment and granted it's a pretty low labor intensity model. But did the number of man hours, if you will, in the stores change much in the quarter and would you expect that to change going forward?

No, no, it didn't. [Our FPs] per store was pretty flat for the year.

Okay. Fair enough. Thank you.

(Operator Instructions). We'll hear next from John Baugh.

Thanks. Good morning. Congratulations Jeff and Dan. Good quarter. Two questions. One on inventory. You made a strategic push to beef that up, but then of course, sales wound up being weaker than you thought. Where is that inventory number relative to where you want it to be? Is it just right? Is it a little high? Do you want to take it higher still for better service? Little color there.

We certainly had a strategy in 2008 of increasing the inventory to increase better service. We feel that that paid off. Now we're looking for ways to be more efficient with that so we expect to see improvement in the inventory levels this year. We did see a reduction in inventory per store at the end of the year. We think that that trend will continue. A lot of our strategic initiatives in '09 are centered around inventory management. We should see that continue to decline on a per store basis.

Help me with the China program. How does that work? A full container going to a store? Do you take pieces of it? Just some of the logistics on how that may work.

First of all, let me say that historically a product purchased from China would be put in a container and shipped to Virginia. Then it would be broken down and shipped to stores -- one product in a container, and then it would be broken down and shipped to stores all over the country. Some of that flooring was making a long trip back and forth.

We have had a program for a number of years where we do some direct-to-store containers, but it was limited to products from one factory. If a factory produced four different SKUs, we could do a container of four SKUs to a particular store. What we're setting up now is a consolidation center where every single SKU that we purchase from China and almost 40% of our product came from China in 2008. Every single flooring SKU will go to this consolidation center so it will be much easier.

There will be a lot more SKUs to put in a container. Virtually every store can get a container of product on a fairly regular basis. We're starting to test in a few months, starting it slowly, small number of stores. But it will reduce transit time, particularly the stores in the Western half of the country from -- I don't remember the exact numbers but let's say maybe 60 days down to 25, 30 days in a lot of cases so a significant reduction in time in transit which there will be huge benefits for that in the future.

Okay. Great. And lastly, you keep talking about new store economics being strong. And I don't have the figures in front of me, what you put out before, the new store ramp. Did you look at that for '08 versus the prior guidance you've given on new store economics? Any metrics you could share on that in terms of return on invested capital, time to breakeven, revenues for the first year, first quarter? Any metric would be helpful. Thank you.

John, we consistently look at the new store model. We're pleased with the performance in the fourth quarter and throughout 2008. Certainly the fourth quarter we had a bit of a downdraft in new store productivity, but it was still in line with our expectations. The new store model that we talked about in the past held throughout 2008. We're going to monitor it throughout 2009. But we expect those economies that we've achieved and that we published to remain conservative. And we'll be able to achieve them going forward.

Not to put words in your mouth, for the year, you are more or less in line with the numbers you had given, albeit probably stronger in the first part of the year than the latter part given the macroeconomic backdrop. Is that fair?

Fair. Just remember the numbers that we had put out in the past were looking forward and had been somewhat historically conservative to the performance of the stores that we had opened previously. Therefore, yes, we were comfortable with the performance in '08. A little bit weaker in the fourth quarter, but not significant. And therefore, we kept our strategy going forward with new store openings in '09.

Just to add to that, the new stores continue to become profitable within three months of beginning their operations. Generally we're seeing a return on our initial cash investment within the first eight months. It's still an extremely strong model.

Great. Thank you very much. Good luck.

Thanks, John.

Hardy Bowen, your line is open. Please go ahead with your question.

Hello, Jeff and Dan. The cost of product from Brazil I'm presuming is now lower and your prices at retail are considerably under other people's prices for that product. Do you see any need to lower your prices as the cost of product comes down or you probably won't?

We review that on a case-by-case basis. We are firmly committed to being a low cost provider of hardwood flooring. If we see a situation where we're getting some cost benefit, our first thought is to look at our retail price and make sure that we're super competitive with that. There are many instances where we have passed those savings on to the customer.

As we've gone into the fourth quarter, do you see more competitors going out of business? Has that picked up? Sometimes it takes a long time for competitors to go out of business.

We continue to see attrition in the marketplace among independents and among some smaller chains. We think that will continue and we think that we'll continue to benefit from that.

Has it accelerated in the fourth quarter? In the first quarter? Do you think or not really?

Not that we've seen noticeably, no.

Not really. Just clarify just a bit. Some of the unique purchases that we had in the first and second quarter were really high margin purchases. While there's still liquidation product out there and we've invested in the merchandising team to manage the whole purchase floor with that, we don't anticipate and we haven't planned for that same kind of unique buy to be out there. There seems to be an adjustment in inventory carrying levels and mill production that doesn't allow for that same kind of product to be available on the market.

Broadly speaking, you want to use this product to get people into the store, some of which can be upgraded to the other products.

Exactly.

That's always been the strategy. That it's a promotional opportunity -- still a great value for the consumer but it certainly provides a promotional opportunity.

The consolidation of product in China if this works and goes according to plan, will it take until the third quarter or the fourth quarter to roll it out to all the stores, roughly?

We're starting a test which should happen in the second quarter. Right now, our plans are very modest in the beginning. We want to make sure that it works. We want to make sure that it doesn't have some negative impacts on other areas of the business. Once we're comfortable with it, we can accelerate it pretty quickly. But we have very, very low assumptions in our 2009 plan.

I see.

If it's good, there's some upside potential there, definitely.

Okay. Sounds good.

Thanks, Hardy.

We'll move next to John [Kurty]. Please go ahead, sir.

Good morning. I have two questions. First off, what amounts are you budgeting for stock compensation expense for 2009? Stock-based compensation?

Roughly similar to 2008, without the impact of the variable plan. If we break out the stock-based compensation expense in a couple of charts in our 10-K. There's a continuing expense for options that have been granted and there are -- as the impact of the variable plan and the acceleration of the vesting of certain options. I'd just encourage you to look there and look that we have had a reasonable historic grant on 2008. We would look to mirror 2009.

I exclude the impact of the variable plan?

That's right.

Okay.

And the acceleration from the --

And the acceleration.

Right.

And then with respect to advertising, can you of give an indication at least in 2008, how much was -- of the advertising spend was devoted to the national advertising campaign? How much was devoted to stuff like trade shows, direct mail, internet searches, et cetera? How you see that mix maybe shifting in '09?

We haven't disclosed the breakout, though. As a guideline, you might keep in mind more of a 70/30 relationship between national and what we would consider direct sale generation or local. It's been our intent -- it was through 2008 and will continue in '09, to shift that spend towards direct mail, local advertising and other promotional events as we leverage the national spend. National spend will continue to increase, just not as quickly as sales.

Are you seeing better buys on that national spend now?

Yes.

Thank you very much.

That concludes today's question-and-answer session. I would hike to turn the conference back over to management for closing remarks.

Thank you for joining us on today's call. We look forward to speaking with you again soon. Bye.

And that concludes today's conference and we thank you all for joining us.