LL Flooring Holdings Inc (LL) 2009 Q3 法說會逐字稿

Greetings and welcome to the Lumber Liquidators third-quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Leigh Parrish of Financial Dynamics for Lumber Liquidators. Thank you. Ms. Parrish, you may now begin.

Thank you. 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 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 introduce Mr. Jeff Griffiths, CEO of Lumber Liquidators. Jeff?

Good morning, everyone. Thank you for joining us for Lumber Liquidators' third-quarter 2009 earnings call. With me on the call today is Dan Terrell, our CFO. I'd like to begin today with a review of some highlights of our third-quarter performance. Dan will then review our financial results in detail, as well as provide an update on our outlook for 2009, and I'll finish up with a few closing remarks. We will then open the call for questions.

We continued our momentum from the first half of the year and turned in an excellent quarter as we remained focused on delivering our unique combination of price, selection, quality and availability. We were able to continue to expand our operating margin as we grew our top line through both new stores and an increase in our comparable-store net sales.

Our commitment to the infrastructure supporting product flow and our inventory position allowed us to continue to expand gross margin and our team continued the successful implementation of certain long-term operating initiatives that began to leverage net SG&A in the third quarter.

Overall we are very pleased with our performance. We feel that we've built the right infrastructure to deliver strong performance through what continues to be a challenging economic environment although with signs of stabilization. In fact, the increase in comparable store net sales in the third quarter of 2009 was the first increase since the third quarter of 2008.

We remain focused on several key goals of our longer-term strategy in the third quarter and we continue to gain market share in the highly fragmented flooring market through the growth of our store base, strengthen our unique value proposition for a customer that is more aware of the cost of their purchases in seeking value, and invest in our infrastructure to generate operating efficiencies that position the Company for sustainable growth while continuing to achieve operating margin expansion.

As a result of our progress on these initiatives -- third-quarter highlights included a total net sales increase of 14.2% with a comparable-store net sales increase of 1.9%; nine new stores were opened in the quarter; an expansion of gross margin and an operating margin of 8.9%; growth in net income of 42.1%; and solid free cash flow ending with over $56 million in cash.

During the third quarter we continued to leverage the appeal of Lumber Liquidators' value proposition. Consumers responded to our call to action marketing geared towards specific offerings and more consistent in-stock positions as evidenced by a continuing increase in foot traffic. We continued to see strong consumer demand in certain key product lines with higher than average gross margins such as laminates, moldings and accessories, but we also began to see encouraging early signs of demand for certain hardwood lines including our flagship Bellawood and our hand scraped Virginia Mill Works products.

The investments we have made in our people continue to support our growth and we believe they are generating real results. During the third quarter we continued to see an increase in the number of customers served at our comparable stores and our average sales stabilized on a sequential quarter basis. As I mentioned, our comp store net sales increased during the third quarter sooner than we expected and we are cautiously optimistic that comp store net sales trends are beginning to strengthen.

Through the end of the third quarter we open 27 new store locations and another seven locations in October and we continue to be pleased with the performance of these stores. As most of you know, our low-cost flexible store model enables us to quickly generate a strong return on capital when opening locations, whether in new or existing markets.

During the third quarter four of our new store locations were in markets not previously served by a Lumber Liquidators store and for the year we successfully expanded into 18 new markets. This new store growth continues to be an important sales driver as we capture market share.

As I mentioned at the start of the call, the efficiencies that we've realized from the investments made in our infrastructure benefited our gross margin in the third quarter. These investments included improvements within our merchandising, store operations, logistics and product allocation.

In addition, our gross margin improvement reflects the continuing shift in our sales mix to premium products within more value priced product lines. While gross margin has benefited from certain external factors which may not continue to the same magnitude, including lower fuel and international freight costs, we believe that many of the efficiencies we've achieved are sustainable. In fact, we believe that our ongoing supply-chain improvements may allow us to offset a significant portion of any future increases in fuel and transportation costs.

To briefly provide an update on our China supply-chain initiative, we continue to move forward as planned on our pilot program with our Asian vendors to supply a range of products through direct-to-store shipments of a variety of materials from a central warehouse in China. We received our initial shipments in September and are now in the process of expanding this initiative to traditional stores.

We were successful in leveraging our national advertising spend over the growing store base in the third quarter. And we also continue to refine and improve the decision processes around our advertising spend as well as the evaluation of the effectiveness of certain key programs.

We are also on track with our plans to upgrade our technology and systems which will enable us to further increase the discipline and efficiency with which we manage operations and better support our long-term growth plans. As we previously discussed, this process will happen over time and the improvements we are making are intended to optimize our warehouse and distribution systems and assist us with better managing our inventory.

In addition, these upgrades will improve product planning and communication across our organization which we anticipate will help us deliver an even better overall customer shopping experience in the future.

Our third-quarter results demonstrate the significant returns on the investments that we've been able to achieve in our business. However, we believe there is more to be done to further improve our execution. As we move forward we will maintain our commitment to invest in the infrastructure supporting our store growth, particularly improvements in merchandising, logistics and information systems.

Overall our team has demonstrated its ability to implement strategic initiatives, realize operating efficiencies and expand operating margin. We successfully delivered profitable expansion and solid operating results in a challenging economic environment. We've also implemented strategic initiatives that should continue to benefit the business over the longer term.

With our attractive value proposition, low cost and adaptable business model, and solid financial position, we are well situated to compete effectively, meet the eventual return in consumer demand and grow the business within our highly fragmented market.

We are cautiously encouraged by the consumer demand trends that emerged during the quarter. Further we are confident the benefits we will continue to see as a result of operating efficiencies that we've successfully achieved. With that said, we are as focused as ever on staying ahead of the market and devising and implementing strategic initiatives to continue improving the business.

We believe we have the right -- we have made the right investments to position ourselves for growth once confidence returns to the marketplace. With that I'd like to turn the call over to Dan for a detailed review of our financial results and an update on our outlook for 2009.

Thank you, Jeff, and good morning to everyone. As Jeff mentioned, I'm going to provide some additional details on our results for the third quarter of 2009 and then discuss our outlook for the year.

Net sales for the three months ended September 30, 2009 grew to $140.5 million, an increase of 14.2% from the $123.1 million for the third quarter of 2008. Comparable store net sales increased 1.9%. The growth in comparable store net sales was driven by several factors including strong customer response to our value proposition, call to action marketing, and a greater focus on a consistent in-stock position of certain key product lines including laminates, moldings and accessories.

The 1.9% increase in comparable store net sales continues a recent strengthening in consumer demand with a 1.8% decrease in the second quarter of 2009 and a 5.8% decrease in the first quarter of 2009. The third-quarter 2009 increase represents our first increase in comparable store sales since the 2% increase in the third quarter of 2008.

We believe the number of customers invoiced in our comparable stores increased approximately 14.1% in comparing the third quarter of 2009 to 2008, though consumers continue to prefer product lines with lower than average retail prices. Our average retail price per unit sold, exclusive of certain service revenue, fell 10.6% in the third quarter of 2009 and our average sale fell 10.7%, implying the unit volume per sale was essentially stable.

Our store base growth includes 27 new locations opened in 2009, nine of which were opened in the third quarter and a total of 34 new locations opened since September 30, 2008. As a result our third-quarter 2009 non-comparable store net sales increased over $15 million. Of the 27 new store locations opened in 2009, 18 were in new markets and we continue to be pleased with the overall performance of our new stores given the challenging environment.

Gross profit increased 17.9% to $51.2 million as gross margin expanded to 36.4% in the third quarter of 2009 compared to 35.3% in the third quarter of 2008. Gross margin continued to benefit from changes in our sales mix to product lines with higher than average gross margins and to premium products within those product lines.

In addition, the gross margin expansion was due to a combination of an increase in the sales mix of moldings and accessories which yield a higher than average gross margin; the successful execution of operational initiatives within store operations and merchandising, particularly in product planning and allocation; and generally lower domestic and international transportation costs resulting from a combination of logistics initiatives and certain international container costs that were generally lower than our historic average.

Selling, general and administrative expenses were $38.7 million or 27.6% of net sales for the third quarter of 2009 compared to $34.6 million or 28.1% of net sales for the third quarter of 2008. Overall, leverage of national advertising, legal and professional fees more than offset certain increases in costs primarily related to our store base expansion and infrastructure investment, including labor costs and occupancy expenses.

Other income, which includes interest, was $116,000 for the third quarter of 2009 compared to $220,000 for the third quarter of 2008. The effective tax rate was 38.3% in the third quarter of 2009 compared to 39.5% in the third quarter of 2008. The 2009 decrease was primarily due to certain favorable one-time adjustments partially offset by lower tax exempt interest income and excess tax benefits on stock option exercises.

Net income for the third quarter of 2009 increased 42.1% to $7.8 million or $0.28 per diluted share based on approximately $27.9 million weighted average diluted shares outstanding. Net income for the third quarter of 2008 was $5.5 million or $0.20 per diluted share based on approximately $27.3 million weighted average diluted shares outstanding.

Turning now to our balance sheet and cash flow. We ended the quarter on in strong cash position with $56.8 million in total cash and cash equivalents, up from $24.8 million at September 30, 2008 and $35.1 million at December 31, 2008. Our operating activities provided net cash of $26.5 million for the nine months ended September 30, 2009 versus using cash of $2.5 million in the prior year period.

Profitable operations combined with strength in merchandising and supply chain initiatives in 2009 generally reduced the build in merchandise inventories and provided greater liquidity. Merchandise inventories totaled $104.1 million at the end of the third quarter, up from $96.5 million at September 30, 2008 and $88.7 million at December 31, 2008.

Available for sale inventory, which are products we have received and inspected at either our central distribution center or at a store location, totaled $87.5 million at September 30, 2009, $86.4 million at September 30, 2008 and $75.5 million at December 31, 2008. On a per store basis available for sale inventory was $494,000 at September 30, 2009, down from $604,000 at September 30, 2008 and $503,000 at December 31, 2008.

We continue to focus efforts on the product mix of available inventory per store and, though the personal inventory is lower than the previous year, we believe our in-stock position has strengthened relative to sales demand.

Working capital was $118.1 million at September 30, 2009, up from $92.8 million at September 30, 2008, and the current ratio was 3.3 times and 3.6 times respectively. Capital expenditures totaled approximately $5 million for the third quarter of 2009 compared to $2 million for the third quarter of 2008. The 2009 capital expenditures included $2.8 million related to our integrated information technology solution.

In addition, capital expenditures in each period were generally for fixtures, equipment and leasehold improvements for new stores, routine purchases of computer hardware and software and leasehold improvements at the corporate headquarters.

Turning now to our outlook for the year. Based on our year-to-date results and current visibility, we now expect net sales to be in the range of $535 million to $543 million for the full year 2009 compared to a previous range of $528 million to $538 million. A comparable store net sales decrease for the full year of 1.8% or better and full year 2009 earnings in the range of $0.90 to $0.95 per share based on 27.7 million diluted shares compared to a previously expected range of $0.85 to $0.91 per diluted share.

We've now opened 34 new locations in 2009 and expect to complete our store opening plan by the end of November. Finally, we expect capital expenditures of approximately $11 million to $13 million in 2009 including $4 million to $5 million for our integrated technology solution. We expect to be cash flow positive in 2009 and remain free of long-term debt. I'll now turn the call back over to Jeff for his closing remarks.

Thanks, Dan. As we head into the fourth quarter we've made significant progress against our strategic plan and we are clearly seeing the impact on our productivity and cost management. We've made the right investments in our business to improve our operations and create efficiencies and, as a result, we've delivered strong performance through some very challenging times.

We are now experiencing improving traffic in our stores, we are serving more customers and we are seeing stabilization in our average ticket which is leading us to be a bit more optimistic in our outlook. While there are still to be challenges ahead, we are confident in our competitive positioning and we expect to maintain our positive momentum over time.

In addition to our supply chain and technology initiatives, which I discussed earlier on the call, I also want to spend a few minutes discussing some actions we are taking to better manage our inventory. To respond to the increasing consumer demand for our products, we've renewed our commitment to in-stock inventory positions and key products.

We've identified certain products in our mix that are consistently top sellers on a regional and per store basis and we've committed to never be out of stock of these items. We believe this strategy will allow us to better meet the current demand and prepare for future demand. Ultimately we believe our approach will enable us to further distance ourselves from the smaller independent hardwood flooring retailers as well as benefit as the macro environment continues to improve.

Finally, I want to share some very exciting company news. As some of you may have seen, Lumber Liquidators was recently ranked number one in Forbes' annual ranking of 200 best small companies in America. We are honored by this designation and believe that our position on this prestigious list, especially in these challenging economic times, reflects the strength of our business strategy and the hard work and dedication of all of our employees. We would like to thank them for their efforts.

There are many unique aspects of our business model that I'd once again like to close with and I think that the recognition from Forbes speaks to each. Specifically, we continue to build on our position as the leading specialty retailer of hardwood flooring in a highly fragmented market. We have a great low-risk high-return store model that allows us to expand despite the external environment.

Our value proposition and a flexible marketing strategy allow us to highlight our quality products at everyday low prices. And we continue to invest in our infrastructure and believe there are more benefits we can achieve from the operating efficiencies we are creating across the business.

All of this makes us confident in our ability to further improve our operations, expand our operating margin, drive traffic, increase our footprint and grow our share of the market. We will now turn the call over to your questions. Operator?

(Operator Instructions). Robert Higginbotham, Goldman Sachs.

Thank you, good morning, Jeff; good morning, Dan. I'd like to talk about your guidance a little bit and what kind of same-store sales or topline guidance is embedded in your earnings guidance. On the bottom line you can do the very simple math of backing into 4Q range of $0.18 to $0.23. And I understand the comments around the same-store sales expectations that you won't see any worse than your year-to-date trends, but I was hoping you could help us understand exactly what kind of same-store sales expectations are baked into that earnings range for the fourth quarter.

Robert, we're talking about a strengthening that we saw in comp sales, it was a little bit ahead of our expectations. We believe that comp sales may be flat to may be up as much as 3% to 3.5% in the fourth quarter. And we expect our new store productivity to roughly be in the range that it was in the third quarter.

Got you, that's very helpful. And you've so far this year given us some very helpful info on the average sale or ticket and your traffic counts as well. Could you help us understand how that might change from the third quarter to the fourth quarter just to understand the comparisons between those different components?

Well, we've seen that traffic increase in the last three quarters. But we've also continued to see that average sale decline mainly because of the average retail price. And we brought that out in the MD&A and the discussion this morning that we really have seen a stabilization of volume per ticket.

We started to see some indications, as Jeff said, that the hardwood buyer may be coming back off of the sideline. That may cause the average sale to increase a bit. And we hope to hang on to the traffic trends that we've seen. We don't really anticipate that traffic trend accelerating from where we were in the third quarter though.

Very helpful. That's all I have, thank you.

Mitch Kaiser, Piper Jaffray.

Thanks, guys, good morning. Congratulations on the Forbes recognition in the quarter. I was hoping, first of all, to talk a little bit about the payables. It looks like that spiked up quite a bit and it was a nice source of cash for the quarter. How should we be thinking about that going forward, Dan?

Well, it's been pretty consistent for three quarters this year, right around $25 million, $25 million to $26 million for each of the three quarters in '09. Certainly against last year it's quite a change. But more or less the timing of the inventory, that has played a part; it's been much more stable this year. We had some timing adjustments last year that impacted that balance. I think (multiple speakers).

So kind of thinking about that $25 million is the way to think about it on a go-forward basis?

Given that the inventory level itself has stayed pretty consistent from [106] to about [104], so that's a relationship that we hope to maintain.

Got you. And then, Jeff, to your comment about the inventory commitment. I know it's come down quite a bit per store. How should we think about inventory as you move to make sure that you have a lot of the never outs in stock all the time?

Initially we probably will see some increase in inventory as we build up some levels on some of those individuals SKUs, and then it will probably level off a bit after a quarter or so. It's not going to be a significant increase, it's really more of an adjustment in some purchasing activity.

Okay, so it will spike up in Q4 and kind of stay at that level?

A small spike, it's not going to be significant.

Okay. And on the ticket, it was mentioned some nice stabilization there. So it looks like maybe if it continues that you're thinking maybe first quarter or second quarter of next year you're not going to have that same dramatic decline that you did previously, is that how we should think about it?

I would say at some point in time in the first half of next year we would expect to start to see some increase there; we really can't pinpoint exactly when we think it will be. But as we said, we're starting -- we feel like we're starting to see some renewed consumer interest in some of the higher priced products, particularly in the Bellawood and some of the hand scraped. Sample request activity has been up, some of the order activity is starting to increase slightly.

So we feel once that filters through we should start to see the average ticket come back a bit. But whether it's in first quarter or second quarter next year is still too early to tell.

Okay, and then just lastly on the direct to stores, do you think we'll see any impact in Q4 or is it still too small?

It's still too small to sample to really have a significant impact. And we felt all along we really wouldn't start to see that benefit until 2010.

Mitch, we just started receiving product in September and while that's picking up and we're monitoring it, it won't work its way through the inventory turn until 2010, even the test program.

Okay, sounds good, guys. Thank you and good luck.

Brad Thomas, KeyBanc Capital Markets.

Good morning, Jeff and Dan. And let me add my congratulations as well on a great quarter. I wanted to follow up on gross margin and see if perhaps you could give a little bit more color on the drivers and quantify the drivers of the gross margin improvement.

I think the biggest driver is the shift in the product mix, which we're continuing to see very healthy sales in laminates; that category is growing much faster than our overall sales. And also the significant improvement -- continuing improvement in moldings and accessory sales. And both of those categories still have a lot of upside potential. Our market share in laminates is significantly below our share in hardwood and we've really expanded our product mix in the category. And a lot of those never out SKUs are going to be in the laminate category. So we think that's really a continuing opportunity.

Moldings and accessories, we've made some improvements in our fulfillment process with those. And again, that's sustainable as well. So those key drivers we think are going to remain. There were some benefits from lower freight costs and lower container rates. And that is something that we're going to probably continue to see maybe to a lesser degree the next one or two quarters. And we think as demand starts to increase at some point in time next year some of those costs are going to start to come back up. We're hoping that we're going to be able to offset that with the China initiative and continuing improvement in our product allocation processes.

Okay, great. And then as we think about that mix benefit that you're getting from some trading down from hardwood, should we see ticket improve next year? Should we see that hardwood customer come back? What kind of a margin headwind could that potentially be in 2010?

Historically the hardwood categories have carried lower -- margins a bit lower than what we experience in laminate. We think the trade-off there is that as the average ticket goes up so we should see some topline strength. And again, we have pretty strong feeling that the continued growth in moldings and accessories and then the improvement in the product allocation, that we can continue to drive margin improvement by balancing that against the higher hardwood sales.

Okay. And then just a follow-up on your financing activity. I believe you just recently switched from HSBC over to GE. Could you maybe talk a little bit about that switch, any changes that we may see in your financing promotional activity and were there any changes to the costs associated with this partner?

I'll take the first part and I'll let Dan handle the financial aspect of it. But GE has a much more robust program than HSBC did. A lot of the financial incentives that they offer consumers are a lot stronger than what we had before, so we're going to be able to offer a lot of different alternative methods of financing for the consumer.

We're also going to have the ability -- the consumer is going to be able to use the card for the HSS installation which was something that we were not able to do in the previous card, so we think that's going to be a huge benefit. And I'll let Dan speak to some of the financial --.

Yes, Brad, we haven't put a whole lot out there. I'll just say that HSBC was a good business partner, it was a good relationship. I'll echo what Jeff said. GE just presented an opportunity to promote the program and added some flexibility with regard to installation that we didn't have before. The discount rates are roughly comparable. We may see a very slight tick-up in that expense depending on the promotional programs that are offered going forward.

Great, thanks again and congratulations on a good quarter.

John Baugh, Stifel Nicolaus.

Good morning and my congratulations as well. Quickly, any metric you can comment on HSS, how that's going?

Nothing that we put out there yet, John. It's been out of there at all stores now and we're pleased with the leads and the closure rates that we've seen and the customer satisfaction has been there. But we really haven't quantified any of the metrics on what it's done as far as sales or profitability.

And then on laminates, where are you getting that from? And as you expand that lineup are you having to go to different sources?

The vast majority of our laminate product is imported from China. We have very strong relationships with a number of mills there that produce for us, and those mills have continued to invest in their business to support our expansion. We're very open in trading our business plans with them. And as we work -- with all the mills we work with, we've been able to go out and find mills and develop relationships with mills that are willing to invest in their business to be able to support our growth.

And then you've commented in the past on where accessories were roughly as a percentage of your mix. Where is that today? Number one. Number two, where do you think that could go over time? And then is that an area where you're out of stock occasionally and you plan to beef up?

The combination of moldings and accessories were at 13.1% in the quarter and about 12.4% for the year. We believe we still have some significant upside potential in that category. My guess -- our goal, and we're confident that it will continue to grow as a percentage at a stronger pace than our overall sales, so it will continue to increase as a percent to our total sales.

We've changed some of the way we fulfill moldings by working with a couple of third party fulfillment suppliers. And we think that we continue to train -- focus on training our store staffs and improve merchandise presentation in the stores. We'll not only improve our attach rate on flooring sales, but we feel like we can expand beyond that to sell moldings perhaps to other parties that might not necessarily be buying flooring from us. So again, I think that long-term that category is going to grow a lot faster than our overall sales.

Great, thank you.

Rick Nelson, Stephens.

Thank you and good morning. Jeff, can you talk about sales momentum during the quarter, how things sort of tracked maybe on a month-to-month basis and how October is looking?

The only comment I'd have about the third quarter is that there was a little bit of a change because of the shift in Labor Day, Labor Day was late this year. So we saw a pretty significant activity immediately following Labor Day and that kind of carried through the month of September. October has been consistent with our plan and we're very encouraged with traffic and order activity and we just feel good about the momentum.

(inaudible) I'd like to ask you about the seasonality of the business. The guidance you're providing implies a smaller fourth quarter than third quarter. Looking historically it doesn't look like that's always been the case and just curious about the seasonality of the business?

The fourth quarter generally is a bit slower, we certainly see a slowdown the last few weeks of December around the holidays. So we don't expect that to be any different this year.

Okay. And then any initial thoughts on store openings for next year? You seem to have the balance sheet and a bunch of cash and the ability to accelerate.

We've always -- a part of the five-year plan has been 30 to 40 stores a year and we said the first few years it would be in the low 30s and the latter years it would be in the upper 30s. So we haven't zeroed in on a number yet for next year, we're still working on that, but my guess is it will be probably a number somewhat higher though, what we end up this year.

Thank you.

Matt McGinley, Morgan Stanley.

Good morning, my first question is a follow up on the credit card agreement with GE Money. Just so I understand this, Dan, other than the discount rates which are slightly higher with GE Money, there would be no other P&L impact from this, there are no bounty payments, there's no profit sharing in the portfolio, is that correct?

That's correct.

And then does GE have the discretion -- is it basically a fixed rate in terms of the line of credit or the availability in each one of these cards or do they have the ability to wholesale reduce the amount that could be made available?

It's a fixed rate, there's a variability within the promotional program that we can offer as far as same as cash or with equal pay. Under HSBC we had offered six months same as cash as our standard program, 12 months as a promotional program generally about once a quarter. With GE we'll be able to offer additional programs that we can vary the months.

I guess and then on top of that, is the aggregate amount that's on that line, so previously with HSBC -- and I'm just making up the number -- if it was $3,000 of credit availability on that credit card, presumably with your installation services partnership the amount that they would need on that card would probably be a little bit higher than that on the GE cards. Does GE have the ability to just reduce that down to a lower level or is it set?

Yes, GE controls the risk metrics that will set the credit line per customer. What we saw under HSBC was that generally the average credit line that was outstanding was sufficient not only for the purchase at Lumber Liquidators but roughly twice the purchase of Lumber Liquidators on an average basis. We anticipate, based on what we've seen so far with GE, that there will be ample amount of available credit for not only the Lumber Liquidators purchase but the installation as well.

Do you know what that net amount is that's on the line?

Well, you know what our average sale is. And generally the lines have averaged more than twice our average sale.

Okay, perfect. And then the second question is, on your commitment to remain in stock on some of these high velocity SKUs kind of begs the question -- I guess there was an issue with out-of-stocks on some of these SKUs. So if I'm thinking about modeling out 2010 as you stay in stock on these items, were the sales artificially depressed in certain quarters because of out-of-stocks that I should expect an increase in comp in some of those quarters?

It'll be within our planned sales increase. I wouldn't make any additional assumptions at this point.

And I'd say, Matt, that there wasn't an individual quarter that was impacted by being out of stock in certain products more than another. We've seen a general strengthening of demand, we've worked throughout 2009 to increase our in-stock positions. But there's not a blip inside of any individual quarter.

And that was largely driven by I guess a product mix shift from hardwoods to laminates that I guess surprised you that made you want to stay more in stock on the laminate?

I think it's just a -- it's an example of continuing improvement in the business as we've invested in the infrastructure and we've added staff, we've added more experienced staff and we made improvements the first year and we learned from that. And this is an example of the second round of improvements.

Okay, great. Thanks a lot.

[David McGee], SunTrust Robinson Humphrey.

Good morning and a great quarter. A couple of questions. One, you mentioned with regard to guidance in the fourth quarter that you expect traffic to be unchanged I guess in the third quarter. If you look -- of course as we looked last year, I guess the comparison is easier in the fourth quarter, I think you were down 4.5% roughly. Was that an ASP issue last year in the fourth quarter or -- and traffic was relatively steady or how does that work last year?

The fourth quarter is where we started to see that consumer shift to a lower average retail price. Give you an idea, the average ticket in 2008 had been running around $1750 and it fell to about $1700 in the fourth quarter of '08. The fall during '09 was even more dramatic. In the fourth quarter of '09 we expect basically a stable ticket with the third quarter.

So the traffic comparison is not as easy as the comp might imply then?

Right.

That's correct.

And then any update that you'd care to give as far as your thoughts on cannibalization either recent trends or your thoughts about impact next year from that factor?

We haven't seen anything unusual. We've talked in the past about cannibalization having a 300 to 500 basis point impact on (technical difficulty) comp sales. We'll probably talk about that more when we release our 2010 guidance.

Okay. And then just lastly, anything new about the Lacey Act, any developments on that front to speak of?

No.

Nothing new other than we're in compliance with all the provisions of the Act. We've worked with our vendors to make sure that we stay in compliance.

Great, thanks a lot.

Chris Buss, Thomas Weisel.

Congrats on a nice quarter, first off. I'm wondering if you could give an update on the SAP implementation, where you stand there?

It's underway, we officially kicked it off in September. And we're on track for sometime in the early part of the second half of next year for implementation of the first phase. And we're very pleased with the progress we've made so far.

And what kind of incremental G&A expense could be associated with that looking forwards?

There's going to be a little that goes through SG&A, but very little in 2010. We'll start the depreciation upon implementation in the second half of 2010, and it may increase depreciation expense 20 basis points, 30 basis points.

Okay, that's helpful, thanks. One other question. I was wondering if you could talk about new store productivity. If I'm doing my math it was down a little bit from the second quarter and down year over year. Any changes there?

The way we calculate it it's almost stable, it's down slightly from the second quarter, second quarter was up from the first. We're right around 51 the way we calculate it and we believe we're going to get back into the mid-50s as the economic situation improves. But we're pleased with where it is right now.

All right, thank you very much.

Laura Champine, Cowen.

Good morning and you may have touched on this, I just hopped on the call. But can you talk about what financial relationship if any you've got with your installation referral service? Because I think that now that you're getting a little more tied in with financing it looks that there might be more of a benefit that they're receiving. Can you comment on just the structure of any agreement you've got with them financially?

Well, first of all our overriding goal with this relationship is that we want to make it as easy as possible for a consumer to buy a floor from us. If they're not comfortable or interested in doing the installation themselves we don't want to put a consumer who wants to have someone do the installation at a disadvantage.

So first of all we want to make sure the price stays as low as possible. And if we feel by offering this service we can drive more flooring sales. So that's really what our goal is.

The financial arrangement is that there's a small benefit for the store from a payroll standpoint to help arrange it. And that's really all we're interested in is making sure that we're offering a very good consistent service and experience for the consumer. We really don't think getting a financial benefit from it, which is going to add cost to pass on to the consumers, is the right thing to do.

Is the installation company funding the bonus -- the benefit on your store employee if they make that referral or set up the install?

Yes.

Yes. And, Laura, also one other thing. They're paying the discount rate through GE. Those transactions, if they're funded on the Lumber Liquidators card, are not going to go through our POS, and that will be their own discount. We're also -- to the degree that it helps benefit the relationship we'll certainly look to them to potentially provide more either promotional activity or in-store support. But we're not changing the nature of the contractual relationship.

Yes, that's a good point. The installers spend a lot of time working in the stores and we don't -- we don't pay for that, that comes out of HSS cost. But when we run a big promotion, often times on weekends the installers will work in the store just to help answer questions and arrange and these guys are all expert floor -- expert on flooring as well. So really that's been a real benefit.

And HSS runs at least one promotion a quarter whether it's a percentage off -- normally a percentage off their regular price. So the relationship has a lot of strong benefits to driving sales for both of us.

Okay. And is it similar to your competitor's relationships with their installers?

I'm sorry?

Is your relationship with HSS fairly standard within the industry or is it significantly different?

I can't really say for sure. We really structured a program that we felt was best for us and for our customers.

All right. Thank you.

[Artie Bowen], [Bowen & Associates].

Good morning, very good quarter. I think in the third quarter you used some very low-priced entry price points to drive traffic. Do you plan on continuing to do that at the same rate? Do you think more of that is warranted, less or what do you think going forward?

We've always been viewed as the low-cost provider; hardwood flooring for less is our driving motto. So we're going to continue to occasionally run promotions with very sharply priced products.

That said though, Artie, our third quarter of '09 was pretty consistent with the other quarters of '09 and the promotional offering and any liquidation buy, that represented the same sales mix as it has.

I see, they're not that much different and you're not planning on much different going forward.

It's been a strategy that customers responded to, so we intend to continue to do it.

Are the contractors doing more business, less business or how is that changing relative to retail?

I can't really say for sure. We don't really follow it that closely.

Okay, so nothing there. The fact that the Brazilian currency has gone up after going down very dramatically but now it's gone up fairly dramatically, does that change the cost structure for that part of hardwood that comes from Brazil?

It certainly puts some pressure on our Brazilian vendors. And as we've always said, we've got a long-term relationship with these mills and if the pressure becomes too much or increases dramatically we'll work with them on a cost structure that makes sense for both of us.

But that's something that will be reflected in the industry generally I guess. So that will just affect overall pricing.

Yes, we would imagine.

The China initiative, how long do you think it will take to roll that out fully?

If it continues on successfully maybe another quarter or so. We just want to make sure we get all the aspects of this correct and do no harm to the business. So it's gone well so far, but we don't want to move any faster than makes sense for the business.

I see. Okay, sounds good.

Thank you. Ladies and gentlemen, we have reached the end of our allotted time for questions. I will now be turning the floor back over to management for closing comments.

Thank you for joining us on today's call. We look forward to speaking with you again soon and keeping you updated on our progress. And go Phillies.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.