LL Flooring Holdings Inc (LL) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lumber Liquidators fourth quarter and full year 2009 earnings conference call. With us today is Mr. Jeff Griffiths, CEO of Lumber Liquidators, and Mr. Dan Terrell, CFO of Lumber Liquidators. As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or part without permission from the company. I would now like to introduce Ms. Parrish of financial dynamics. Please go ahead.

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 U.S. securities laws 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 on this call. Now, I'm pleased to turn the call over to Mr. Jeff Griffiths, CEO of Lumber Liquidators. Jeff?

Good morning, everyone. Thank you for joining us for our earnings call today. With me on the call today is Dan Terrell, our CFO. I would like to begin today with a review of highlights of our full year performance. Dan will then review our financial results for the fourth quarter and full year, as well as provide our outlook for 2010. I will return with comments on our growth strategy and focus for the remainder of the year before we open the call to questions.

We are very pleased with our strong finish to 2009 as our team continued to execute, and we leveraged our infrastructure enhancements to increase net sales and margin for the year. Our bottom line results were at the high end of the revised expectations which is all the more gratifying given the challenging environment we operated within throughout the year. We believe our results continue to reflect the flexibility and resilience of our business model.

We built momentum as the year progressed and ended 2009, well positioned to continue to expand our market share and drive sales growth moving forward. Throughout the past year, we have discussed key goals of our longer term strategy with you, which are to gain market share in the highly fragmented flooring market, through the growth of our store base; to strengthen our unique value proposition for our customer, that is more aware of the cost and seeking value in the purchases; and to invest in our infrastructure, to position the company for sustainable growth and achieve operating margin expansion. Looking at our full-year results for 2009, our focus on those key goals enabled us to achieve a total net sales increase of 12.9%, flat comparable store net sales with a return to positive comparable store net sales in the second half of the year, and a 5.5% increase in comparable store net sales in the fourth quarter.

36 new stores opened in the year, expansion of gross margin to 35.7%, an increase in operating margin to 8%, and growth in net income of 21.6%. We remain committed to delivering our unique combination of price, selection, quality and availability to customers throughout the year, and we were able to continue to grow our top line through the addition of new stores, as we maintained comparable store net sales even with the prior year. In 2009, we opened 36 new locations, and ended the year with a total of 186 locations operating in 45 states, achieving our expansion goals for the year. We continue to be pleased with the performance of our new locations.

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. For the year, approximately two thirds of our new store locations were in markets not previously served by a Lumber Liquidators store. New store growth continues to be an important driver of sales and market share expansion. We have already opened nine locations to date in 2010, including one in North Dakota, our 46th state of operation and we remain committed to our long-term expansion objectives.

Consumers responded throughout the year to our value proposition, as well as our call to action marketing geared towards specific offerings and more consistent in stock positions. We saw increasing foot traffic as the year progressed, and as we closed out the year, we continued to see an increase in the number of customers served in our comparable stores. During the year, we saw strong consumer demand in certain key product lines with higher than average gross margins such as premium laminates, moldings, and accessories

On last quarter's call, we discussed actions we are taking in reaction to commitment to in stock inventory, in response to increasing consumer demand for our products. We've identified certain key products in our mix that are consistently top sellers on a regional and per store basis, and increased our commitment to never be out of stock on these items. While this in stock strategy lead to a slight increase in our inventory and slightly impacted gross margin as we ended 2009, we believe this strategy is allowing us to better meet the current demand and prepare for future demand, enhancing our value proposition. We will further distance ourselves from the competition as we become more efficient in implementing our strategy. I will talk more about our never out of stock inventory strategy later on in the call and how this fits into our overall growth strategy. Our on going commitment to the infrastructure supporting product flow and logistics allowed us to continue to improve overall gross margin in 2009. Looking at the year, we benefited from a shift in sales mix to premium products within our more value priced product lines that carry a higher margin than our average gross margin.

In addition, gross margin continued to benefit from infrastructure investments including improvements within our merchandising, store operations, logistics, and product allocations. As a result, we were able to move record quantities of units through our warehouse facilities to our stores. While gross margin also benefited from certain external factors in 2009, including lower fuel and international freight cost, which may not continue to the same magnitude in the coming year, we believe that many of the efficiencies we achieved are sustainable.

In fact, we continue to believe that our ongoing supply chain improvements may allow us to offset a portion of any future increases in fuel and transportation costs. Our team also continued the successful implementation of certain long-term operating initiatives that benefited SG&A. In relation to our national advertising program, by further improving the decision processes around our advertising and our tools to evaluate the effectiveness of certain key programs, we were successful in leveraging our total spend over the growing store base. Overall, we are very pleased with our performance in 2009. We believe that through a challenging time in our industry, our team excelled by continuing to deliver profitable expansion and solid operating results.

As we ended the year, we were experiencing improved traffic in our stores and serving more customers as they continued to respond very positively to our value proposition. We believe the strategic initiatives that we have executed over the past year should benefit the business long term. While we expect there will continue to be challenges in the year ahead, we are continuing to strengthen our competitive position, and we expect to maintain our positive momentum over time. With that, I would like to turn the call over to Dan for a detailed review of our financial results and our outlook for 2010.

Thank you, Jeff, and good morning everyone. As Jeff mentioned, I'm going to provide some additional details on our results for the fourth quarter and full year 2009, and then discuss our outlook for 2010. I will start with our results for the fourth quarter. Net sales for the three months ended December 31, 2009, grew to $137.1 million, an increase of 17.6% from $116.5 million for the fourth quarter of 2008. Comparable store net sales increased 5.5% for the fourth quarter of 2009, which compares to a decrease of 4.6% in the fourth quarter of 2008, and follows a 1.9% increase in the third quarter of 2009.

Customer demand continued to strengthen, driven by increased recognition of our value proposition, including a greater focus on a consistent in stock position of certain key product lines such as laminates, moldings, and accessories. As we had previously discussed, these product lines generally carry a lower than average retail price, and customer preference for these products has continued to decrease our average sale which was down 10.7%, in comparing the fourth quarters of 2009 and 2008. That decrease in average sale primarily resulted from a 10.4% drop in the average retail price per unit sold, thereby implying the square footage per sale was essentially stable.

Applying our average sale to comparable store net sales, we believe the number of customers invoiced in our comparable stores increased 18.1%, in comparing the fourth quarter of 2009 to 2008, and follows an increase of 14.1% in comparing the third quarters of both years. Net sales at non-comparable stores increased $14.2 million in comparing the fourth quarters of 2009 and 2008. We opened 36 new locations in 2009, including nine in the fourth quarter, and ended the year with 186 stores operating in 45 states.

A Of the 36 new store locations, 24 were located in new markets. Overall, we continued to be pleased with the performance of our new stores, particularly given the challenging environment. Gross profit increased 21.2% to $48.4 million, as gross margin expanded to 35.3% in the fourth quarter of 2009, up from 34.2% in the fourth quarter of 2008. Gross margin continued to benefit from sales mix shifts to product lines with higher than average gross margins, and within those product lines, consumers continued to prefer the premium products.

Gross margin also benefited from a combination of an increase in the sales mix of moldings and accessories, which yield a higher than average gross margin; continued successful execution of certain operational initiatives within store operations; merchandising and product allocation; and generally lower domestic and international transportation costs, resulting from a combination of logistics initiatives in certain international container costs, which are generally lower than our historic average. Partially offsetting these benefits were certain additional costs related to our planned increase in merchandise inventories. We ended the fourth quarter with available inventory per store at 588,000, up from 494,000 per store at September 30, 2009, and 503,000 per store at December 31, 2008.

As Jeff touched on, we strengthened our commitment to in stock position of certain top selling products by region. In addition, we built seasonal merchandise inventory levels earlier than in prior years. As many of you know, consumer demand for our products increases throughout the first quarter and generally reaches a spring peak in April. Further, the Chinese new year creates an interruption of a week to ten days in shipping products from certain ports in Asia.

We chose to build merchandise inventories fully in advance of the Chinese new year celebration, which began on February 14. Whereas in prior years, that build was graduated. We believe the timing of this build added approximately $40,000 of available for sale inventory per store, which we expect will be sold through by the end of April 2010. We generally define available for sale inventory as products we have physically received and inspected. Selling general and administrative expenses were $36.8 million or 26.8% of net sales for the fourth quarter of 2009, compared to $28.8 million or 24.7% of net sales for the fourth quarter of 2008. Note, however, that the fourth quarter of 2008 included a benefit of $3 million as a reserve related to the final accounting for a certain equity plan was reversed.

Exclusive of this benefit, SG&A expenses in the fourth quarter of 2008 were 27.3% of net sales. This improvement in SG&A expenses, as a percentage of net sales, was primarily driven by national advertising leverage and a reduction in certain other costs, partially offset by increased costs related to infrastructure investment and store-based expansion, including labor and occupancy costs. Other income, which includes interest, was $110,000 for the fourth quarter of 2009, compared to $215,000 for the fourth quarter of 2008.

The effective tax rate was 38.9% in the fourth quarter of 2009, compared to 42.3% in the fourth quarter of 2008. The 2009 effective tax rate decreased primarily due to certain reductions in state income taxes and excess tax benefits on stock option exercises. Net income for the fourth quarter of 2009 was $7.1 million or $0.25 per diluted share, based on approximately 28.1 million weighted average diluted shares outstanding. 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 2008 after tax benefit of the final accounting for the certain equity plan I mentioned earlier, increased diluted earnings per share by $0.07 in the fourth quarter of 2008. I would now like to discuss our results for the full year. Net sales for the year ended December 31, 2009, grew to $544.6 million, a 12.9% increase from $482.2 million for 2008. Comparable store net sales were unchanged in comparing 2009 to 2008, and follow an increase of 1.6% in comparing 2008 to 2007. Our sales increase for the year was driven by increased volume, which was partially offset by a decrease in our average sale.

n our comparable stores, we believe the customers we invoiced increased 12.4% in comparing 2009 to 2008, with increases building from 3.1% in the first quarter, 13.6% in the second quarter, 14.1% in the third quarter, and finally 18.1% in the fourth quarter. Partially off setting this increase in volume was an 11% decrease in the average sale, driven primarily by a 10.5% decrease in the average retail price per unit sold. Gross margin for 2009 expanded 90 basis points to 35.7% from 34.8% for 2008. In 2009, we believe up to 30 basis points of the benefit relate to the impact of certain international container rates, which were lower than our historic average. In 2008, we believe approximately 40 basis points related to items we would consider nonrecurring or unique, including the retroactive rebate of a bamboo tariff and the impact of certain liquidation buys.

Otherwise, as I mentioned for the fourth quarter, we attribute the expansion to a combination of shift in sales mix to higher margin products and successful execution of initiatives within store operations merchandising and logistics. SG&A expenses for the full year 2009 were $151.1 million, compared to $130.7 million in 2008, which again included the fourth quarter benefit of $3 million related to the final accounting for a certain equity plan. Excluding that fourth quarter 2008 equity plan benefit, SG&A expenses were 27.7% of net sales in both 2009 and 2008, and operating margin was 8% in 2009, up from an adjusted 7.1% in 2008.

We had income of $498,000 related to interest and other items in 2009, compared to $807,000 in 2008. The effective tax rate for 2009 was 39%, the effective tax rate in 2008 was 41.4%, but exclusive of all impacts related to the final accounting for that equity plan, the effective rate was 39.7%. Net income for 2009 was $26.9 million, or $0.97 per diluted share, based on approximately 27.7 million weighted average diluted shares outstanding. Net income for 2008 was $22.1 million, or $0.82 per diluted share, based on approximately 27.1 million weighted average diluted shares outstanding. Again, excluding all impacts related to the final accounting for the equity plan the 2008, adjusted net income was $0.78 per diluted share. Turning now to our balance sheet and cash flow.

We ended the year with $35.7 million in total cash and cash equivalents, up from $35.1 million at December 31, 2008, but down from $56.8 million at September 30, 2009. As discussed, the plan build in merchandise inventories during the fourth quarter increased the total balance by $29.2 million to $133.3 million at December 31, 2009, from $104.1 million at September 30, 2009. The total merchandise inventories balance at December 31, 2008 was $88.7 million. A portion of the increase related to the timing of inbound in transit inventory, which represents products we have taken legal possession of at the foreign port but not inspected, the inbound in transit inventory was approximately $24 million at December 31, 2009, up from $16.6 million at September 30, 2009, and $13.2 million at December 31, 2008.

As I mentioned earlier, the remainder of the merchandise inventories increase was in available for sale inventory averaging 588,000 per store at December 31, 2009. Again, we believe up to $40,000 per store relates to our plan change in the timing of the spring season build, with the remainder of the per store increase related to our strengthening of the in stock positions of the certain top selling products. Working capital was $124.1 million at December 31, 2009, up from $96.2 million at December 31, 2008. And the current ratio was 3.2 times and 3.6 times respectively

Capital expenditures totaled approximately $11.4 million for 2009, compared to $7.4 million for 2008. The 2009 capital expenditures included $3.9 million related to the integrated information technologies 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 2010.

We currently expect net sales for the full year in the range of $620 million to $645 million, which includes a comparable store net sales increase in the low to mid single digits in 36 to 40 new store locations and an approximately equal mix of new and existing markets. Our net sales estimates are based on Lumber Liquidators, continuing to gain market share and experience increased traffic, as consumers continue to favor our value proposition over our competitors. We expect the residential flooring market to remain under economic pressure, at least until the second half of 2010, and therefore we believe many of the sales mix trends we have seen in 2009 will continue throughout 2010.

We expect gross margin for 2010 to range from the 2009 level to a slight expansion, with the expansion potential primarily in the second and fourth quarters of 2010. We believe certain initiatives, including our China consolidation center, will offset certain expected cost increases including international container rates. We expect 2009 earnings per diluted share in the range of $1.10 to $1.20, based on a diluted share count of approximately 28.4 million shares and an effective tax rate in the range of 38.5% to 38.8%. We expect capital expenditures in the range of $15 million to $19 million in 2010 as we continue to invest in new store openings, remodel existing stores, and implement our integrated technologies solution. Finally, we expect to be free cash flow positive in 2010 and remain free of long-term debt. I will now turn the call back over to Jeff for his closing remarks.

Thanks, Dan. While the past year was challenging for the industry, we believe that we have established a business and growth strategy that will allow us to deliver long-term shareholder value regardless of economic conditions. As we head into 2010, while we do not anticipate a near term recovery in the economy, we are continuing to see stabilization and even some positive trends, and we are optimistic that the worst may be behind us

We are as focused as ever on remaining the leader in our market and implementing strategic initiatives to continue improving the business. With our attractive value proposition, proven store model, and solid financial position, we are well positioned to compete effectively, meet strengthening consumer demand, and grow the business win our highly fragmented market. Further, we are confident in the benefits we will continue to see as a result of operating efficiencies we have achieved in our business.

I would like to take a few moments to update you on some of our strategic growth initiatives for 2010, which will help us achieve our long-term goals of expanding our market share, strengthening our unique value proposition, and positioning the company for continued operating margin expansion. First, as Dan and I have both noted, in 2010 we expect to continue leveraging our proven store model to further expand our store base in keeping with our goal of opening 36 to 40 stores per year in new and existing markets, over the next several years. We are pleased that we continue to have a debt-free balance sheet and significant financial flexibility, which will allow us to maintain our expansion strategy. Second, we will be continuing our never out of stock inventory strategy. I mentioned this earlier on the call and also spoke briefly about our commitment to in stocks on our third quarter call.

Looking forward to 2010, I would like to briefly discuss how this fits into our growth strategy. Our never out of stock strategy ensures that a selection of key products must be in stock at each store location in sufficient quantity at all times. Last year, we developed tools that provide us greater product level visibility to quantify merchandise inventory needs versus demand on a regional and per store basis.

As a result, we have created a matrix of products, stores, and weeks of supply. We are pleased that our vendors are working closely with us and have committed to expanding their production capacity and ensuring a consistent flow of these key products. This strategy will support our growth and has a number of benefits to our business. We anticipate this commitment to in stock positions in key products will enhance our value proposition and be beneficial in continuing to capture additional market share.

Further, we believe that now is the right time to make this investment when many of our competitors cannot or will not. Importantly, we view the increased investment in inventory as low risk to our business, given there is little change in our product mix and our inventory has a low risk of obsolescence. As we continue to refine this strategy and get more efficient at managing it, we believe available inventory per store will return to levels more in line with those we saw earlier in 2009. A third strategic initiative that is expected to play an integral part in our never out of stock strategy and facilitate our growth in 2010, is our China supply chain initiative.

We are very pleased with the progress that we have made up to this point, since launching our pilot program last year. We are moving forward as planned in the expansion of 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. This initiative included 17 stores as of the end of 2009, and we are on track for over one third of our store base to become part of this initiative by the end of 2010.

In addition to continuing to expand the number of products in this program. Finally, we are also moving forward successfully in the upgrade to our technology and systems. This initiative will enable us to further increase the discipline and efficiency with which we manage operations and further support our long-term growth plans. As we have previously discussed, this process will happen over time in a way that we believe minimizes risk, and we anticipate going live in the third quarter of 2010. These upgrades will improve product planning, allocation and distribution, as well as communication across our entire organization, which we anticipate will help us deliver an even better overall customer shopping experience in the future

Before I close, while not one of our strategic growth initiatives, I also wanted to briefly discuss our marketing and specifically our social media efforts. In addition to our Facebook pages and three unique twitter accounts, which our marketing team has created, we recently launched Lumber Liquidators own iPhone APP, the floor finder, which allows customers to view flooring samples, view customer makeovers, and determine pricing and specific flooring needs right from their iPhone.

This is an example of how our team is staying ahead of the competition in our marketing activities, as well as the positioning of the Lumber Liquidators brand. To close, we look forward to further increasing our market share and driving earnings growth in 2010. We will continue to take advantage of our ability to expand our store base with minimal up front expenditure and increase our share in the highly fragmented market, in which we operate. While we remain cautious about the macro environment, as we look into the coming year, we are confident that we will benefit from our growth initiatives as well as additional operating efficiencies and will be able to continue to improve sales and operating margin. We would also like to thank our employees for all of their hard work in 2009 and as we move forward into 2010. We look forward to providing you with updates on our progress throughout the year. We would now like to turn the call over to questions.

Thank you, ladies and gentlemen. (Operator Instructions) One moment while we poll for questions. Our first question is coming from Robert Higginbotham of Goldman Sachs.

A couple of questions. First of all on advertising, your dollars were essentially flat year-over-year despite what it is, of course, pretty robust growth, and I know you are doing a lot to optimize how you allocate those dollars. Could you help us think about what we should expect to see going forward, given you obviously opened more stores, and you will add things like direct marketing and more kind of localized efforts?

We are confident that long-term we are going to continue to be able to leverage the advertising in the 40 basis point, roughly, on an annual basis, and that is mainly through efficiencies of having more stores in a given market, so even though we will be expanding our local advertising efforts, there is a larger store base to support that. And we are continuing to analyze every promotion that we run, every event we participate in, and we are just making better decisions on where to spend those dollars. Quite Frankly, in 2009, we did benefit somewhat from a lot of favorable rates, which are continuing early into 2010, but long-term, we are not counting on that to continue long-term.

Got it. And then my second question is on deposits, which were down year-over-year, despite a high teens overall sales growth. Could you give us some color this terms of why that would be? I imagine some of that is mix related as you shift towards laminates, but maybe you could help us understand that better.

Yeah, rob, it is related to mix partially. But we did experience a decline in open orders as we rolled out the increase in inventory per store. We also had some weather-related issues towards the end of the year in certain regions of the company. So we ended the year down, on a year-over-year basis from 2008, but I would like to comment that we saw some increased demand in the first quarter, and we have actually seen that open order build to a more commensurate with sales Level 2010 versus 2009. And can I also clarify, I misspoke earlier when I said that I expected $1.10 to $1.20 from 2009, I meant 2010.

Great, thank you.

I just add to that the deposit level relationship and open order relationship will change as we have higher inventory level, because we are able to fill orders faster.

Understood. Thank you.

Our next question is coming from John Baugh of Stifel Nicolaus.

First question is on lumber costs, I know they are going up fairly dramatically here in the U.S. I was wondering what color you could give to your outside sources, and to the extent they are not going up as much, what kind of competitive advantage that may or may not give you this year. And also, whether any of these inflating lumber costs are going to impact that inventory number, either forward looking for backwards looking.

We have seen some increases in lumber costs in the North American market. First started to hear about them late last year and early into this year. I know that some of the domestic flooring manufacturers have made some announcements about price increases. We have not seen it yet in the international markets that we are buying from. I think a couple of the advantages that we have there is that the mills we buy from, we often times are their entire production, or the vast majority of their production, so I think we are in a stronger position in working with them on that. Part of the early inventory build, this was an unintended benefit from the inventory build perhaps.

But I think that with reduced demand over the last couple of years, there have been a number of mill closures, and there has been some cutback in capacity ,so now that demand is starting to come back slowly, in the U.S. there are some shortages. We think that is going to probably impact everyone, not just us, to a certain degree as we go forward. Probably will not impact us as quickly as others because of the reasons I just stated. But if it is more of a long-term factor that we have to deal with. It doesn't take away the competitive advantages that we had previously, so we feel like price increases across-the-board affect everybody, and we can still compete very effectively in an environment like that.

Great. I saw on the K, that you mentioned the container rates helped 60 basis points in the last half of the year. I think you made a comment 30 basis points for the whole year. How do we think about that number '10 for the whole year versus '09?

In '10, we expect to continue to get favorable rates. Not as low as we had against our historic average, so you are right, we feel like we had about 60 basis points of benefit in the back half of 2009. There has been a lot of pressure on rates through the Chinese new year, some of them pretty well publicized. We think that is going impact costs. It generally takes about a quarter to roll through, but in the first half of 2010, we think we are actually going to have a benefit related to international container rates, and then we may see price pressure in the second half of 2010.

Okay. And then just quickly, Jeff, and what you are seeing in early '10, are you seeing any change in the mix? Are we seeing anymore hardwood sales basically, or is that still running with 54% of mix?

So far this year is very consistent with what we experienced in the latter part of last year.

Great, thank you.

All right.

Thank you. Our next question is coming from Matt McGinley of Morgan Stanley.

Hi, good morning. On the gross margin guidance you gave, you said you would expect slight gross margin expansion in the second and the fourth quarters. Is there something specific on those quarters, or is that just going to be up more because it is lapping the easiest comps from 2009?

Primarily just because of what we are lapping from 2009.

Okay. And then on the ticket, I believe the last call in the third quarter, you said you expected the ticket to get a little better in the fourth quarter. Were you surprised by the declines in that? I think that you said that you expect those declines to continue again into 2010?

We felt we were beginning to see early signs of the hardwood buyer coming back off of the sideline at the end of the third quarter and that didn't pan out the way we expected in the fourth quarter, still pleased with the traffic we got. In looking forward to what we have seen through the fourth quarter and into the early part of the first quarter, we believe we are going to be able to generate our top line off of Volume gains, and we don't really see the ticket expansion coming in the first half of 2010, possibly in the second half.

Was any of that inventory build driven, but you purchasing for that expectation and then it not occurring, or was this purely Chinese new year and --

It was really more driven by the products we received from China which are the laminates, and bamboos, and the hand scraped, and the lower priced stained oak products, which are all the products that really have been driving the growth of the business. We don't need as much of a lead time with the domestic hardwoods. So, you know, it worked out that where most of that increase was are in the categories that are still driving business.

Okay. Great, thank you.

Thanks -- great, thank you.

Thanks.

Thank you. Our next question is from Budd Bugatch of Raymond James associates.

This is TJ filling in for Budd this morning, thanks for taking my question. I wanted to piggyback a little bit on John's previous question as to maybe what mix you guys sort of have built into your guidance, what you are anticipating in for the full year? I take it from some of your volume and ticket comments, that you might expect a return to some more hardwood spending in the back half. What does that do to the gross margin commentary you gave us, Dan, earlier? And what do you have built in there?

We are anticipating that the gross margin stay flat in 2010 to 2009 with, again, a little possibility of some expansion in the second and fourth quarter, such that for the full year we may get just a slight bit of gross margin expansion. We Modeled into our guidance, both top line and the $1.10 to $1.20 for 2010, that the sales mix trends we saw in 2009 continue.

We don't anticipate that some of the lower average retail price points are going to accelerate, but we believe that they going to maintain their sales mix shifts, at least through the first half of the year. And our model shows that they are going to remain strong in the second half, though we may see a little bit of hardwood come off the sideline late in the year. If that happens, that will continue to put a little bit of pressure on the gross margin. But we believe some of the initiatives we will have in place will offset that margin pressure, such that we will end the year equivalent to 2009, or with slight expansion.

And that shift back to hardwood sales drives some stronger top line, which drives some strong gross margin dollars. So we feel like we are well positioned to benefit regardless of which way the product mix shift goes.

Okay. That is very helpful, guys. And the second question I had was, in the K you talked about the difference in comps amongst the stores of older age, versus the newer ones. In those older stores, being down 3.9%, was there any impact from cannibalization that you can pars out in there, or was that just what you would expect in this environment from a store that has had an established top line?

The biggest impact is canibalization. All those older stores were the first store, or in some cases the second store, in major metropolitan markets, and that is where we have added significant amount of additional stores.

Within that paragraph, is actually where we are talking about the cannibalization of older stores, where we give what the stores were down by, but what they would have been had there not been cannibalization. Both numbers are in that paragraph.

All right, guys. That does it for me. Thanks again for taking the question.

Thank you.

Thank you. Our next question is coming from Rick Nelson of Stephens, Inc.

Hi, Good morning guys. This is actually Nate Mendez in for Rick, he's traveling. Most of my questions have been answered but I was wondering if you could give me a sense of the cadence of sales into the quarter and into the current quarter?

We don't break out monthly performance, but November was an extremely strong month, which is historically a strong month for the business, and then December tends to tail off towards the latter part because of the holidays. And then coming into this year, we are pleased with where we are so far, but no further comment on breakdown.

I would reiterate November is usually the strongest month of the fourth quarter, and it was the strongest month of the fourth quarter in 2009. December always quiets down as the holiday comes, and we had some unusual sales trends with the various weather happenings throughout the regions.

Okay. And then just one other quick one, and I apologize if I missed it. Can you talk about the pace of new store openings, or how you are thinking of that for 2010? And then, I guess, give a sense of how many are coming from new markets versus existing? Are they kind of evenly split?

The pace should be similar to what we experienced last year on a per quarter basis, and we expect the split between new and existing to be more in line with the 50%. Last year it was two thirds new, so closer to 50 this year we think.

Okay, great. Thanks so much, guys.

Thanks.

Thank you. Our next question is coming from Brad Thomas of KeyBanc Capital Markets, Inc.

Thanks. Good morning, Jeff, good morning, Dan.

Good morning.

Just wanted to follow up on the inventory and you definitely gave some very helpful color around that. But just wanted to see if we could try and quantify a little bit more how much the different factors impacted the inventory level. Dan, I think you said it was $40,000 per store as a result of buying ahead of new year which my calculation would be about $7 million. Are you able to quantify how much of the result of an earlier seasonal build or maybe anymore color you can give us in terms of numbers would be great.

Right. Well, the $40,000 per store is what we are saying is the seasonal build that we think will sell through by the end of April, which, you know, we ended the year at $588,000 per store. We expect to roughly carry between $540,000 and $550,000 when you take out that $40,000 through the remainder of 2010. And if you compare that to where we carried inventory last year on an available per store basis, the difference would be what we attribute to the never out of stock program.

Keep in mind, also, that when you are looking at the comparison of year end inventory for 2009 to 2008, we make decisions regarding inventories 90 to 120 days prior because of the large quantity that we are importing. And in September of 2008, there was general concern about which way the economy was going, and our major priority was just being cautious, overly cautious, and so we ended the year very low based upon decisions we made back in September of that year.

And as we got more confident in the trends in the business in 2009, and we started to look at where there were opportunities for us to continue to further distance ourselves from our competitors who certainly, quite Frankly, we are a lot more visible in this market now than we were a few years ago, and our competition is paying a lot more attention to us, and I think that they are trying to Figure out ways to lessen or under negait some of our competitive advantages

So one of our long-term goals is to continue to differentiate ourselves from them, and we felt that making a solid commitment to be in stock is something that most of our competitors just will not or cannot do. So when we were working on that in the middle of last year, we started to place those commitments in August and September of last year. And because China is a greater percentage of our business than it had been historically, 44% of our products came from China in '09 versus 40% in '08, and we think that trend is probably going to continue to grow much longer lead time for ordering so that the Chinese new year has a bigger impact on our business than it ever has before.

And quite Frankly it was something we had never really prepared for in the past and we found that we were behind there and we were playing catch-up for the first half of the year just as we were going into some of our key months, March, April, May, June. It was a combination of all of those factors that led us to make that decision to do that build. So I don't think it is really quite as dramatic as it looks to on a year-over-year basis when you think about the world we were in at the end of December 2008 versus now.

Great. That is helpful, thanks, Jeff. And then could you just give an update on the China direct to store program and how many stores are in the program at this point? Has it been expanded beyond just the pilot, and how many SKUs is it affecting right now?

We have added a few more stores over and above the 17 that we ended the year with. I think we will probably have somewhere in the mid 30s by the end of the first quarter. I'm not quite sure the exact number of SKUs going through, but it is most of the laminate bamboo, hand scraped SKUs that are now going through, which is 35% to 40% of the business, probably close to.

Both have expanded stores and SKU count and we are pretty much on plan where we anticipated being so we are comfortable with what see are seeing come through there.

And then, just a follow-up on financing. I know last quarter you switched over to GE as your financing partner. Any changes in terms of what you are seeing in terms of approval rates, and any opportunities that you found to leverage that new partnership?

We have been pleased with the transition. We believe we are reaching some customers we may not have reached previously. We are able to offer some promotional programs that we weren't previously able to reach, or weren't able to offer. Certainly as we go through this transition, where we are not going to be able to offer same as cash financing, no one will with the change in the law, we think GE is going to provide us with a number of alternatives, financing programs with pay, where we can defer interest.

That will provide us benefit going forward. So I wouldn't say that we saw significant change in the fourth quarter, or even here early in the first, but we have been pleased with the relationship and we anticipate good things for the remainder of 2010.

Okay. Great. Thanks so much, guys.

Thank you. Our next question is coming from David McGee of SunTrust, Robinson, Humphrey.

Thank you, good morning and good quarter.

Thanks, David.

A couple of questions. One is, although your sales certainly are strong and there wouldn't seem to be any indication of share issues, but given that some of our competition has been talking up the category a bit more in some recent quarters. As you look at your store base, in those stores that compete against one of our large box competitors and those that didn't, are you seeing any kind of trends there in how sales are progressing?

No, I think that we continue to believe that it is an advantage for us to be open close to the big box retailers. We feed off of their traffic. But again, as I said earlier, it is our assumptions. Are that they are paying more attention to the category, and they are going to continue to be more focused on it, and they will probably get better than they had been in the past, but that we are going to continue to enhance our value proposition to stay ahead of them.

Thank you. And then secondly, are you seeing much differential this year with regard to the cost of new stores, the real estate versus what you were paying last year?

No, the real estate is still pretty favorable. We still feel like we are able to get locations that are slightly better than what we had gotten historically for about the same rights, haven't really seen any change there.

Great, thanks a lot.

Thank you.

Thank you. Our next question is coming from Laura Champine of Cowen and Co.

Good morning guys, I know you have given a lot of information on your inventories, but it does look like most of the increase is to improve your in stock levels, does that mean this is now a base level and on an absolute basis the numbers should be at or above this 133 million level throughout this year?

We think that on a per store basis, as Dan mentioned, that number will start to come down in a few months. I think that as we get better at managing this, we are going to find that there is some SKUs, that we don't need to carry as many weeks of supply as we have set up in the system now ,and we will further refine it. And maybe we will be able to manage the timing a little bit better with the release of some of the products next year. But, I think going forward you will see, rather than us trying to be really, really lean at the end of December, to be managing the December inventory to maximize the first quarter sales.

And Laura, one other thing to point out, that the in transit inventory was up quite a bit at the end of the year. It was almost $24 million of the $133 million. If you focus on the available inventory, we think that $530,000 to $550,000 per store, but we don't anticipate the inbound in transit being as high as $24 million at the end of the quarters of 2010, so just to make that adjustment.

Okay. On the gross margins, I'm a little surprised that you are not looking for gross margin up in Q1 given the benefit that you got on the container rates year on year, and it is an easier comparison, certainly, than what you got in Q4. Is there anything else going on there in Q1 that should compress your gross margin?

No, but we were pretty pleased with the margin that we posted of 36 in Q1 of '09, so we felt like that was a strong number that had some benefit in there that we may not see. So we felt if we could match that number that we would be in good shape.

Got it. Thank you.

Thank you, ladies and gentlemen. We do have time for one last question. And that question is coming from Christian Buss of Thomas Weisel.

l had one question around some commentary in the 10K that it will take into the fourth quarter to get the always in stock program in place. Should we be thinking about more of an inventory build through the end of the quarter?

We are going to build a little bit of inventory mid quarter. By the time we get through March, remember, March is a strong month for us, kind of the beginning of the very strong remodeling spring season, so we actually think inventory, per store, will be lower at the end of March than it is at the end of December.

And then can I just ask one little house keeping question? How much of your sourcing is currently coming from China right now?

Last year it was 44% versus 40% the year before. We expect that will probably increase again this year.

Thank you very much.

Thanks, Christian

Thank you, ladies and gentlemen. At this time I would like to turn the call back over to Mr. Griffiths and Mr. Terrell. Gentlemen?

Thank you for joining us on today's call, and we look forward to speaking with you again soon and keeping you updated on our progress.

Thank you.

Thank you, gentlemen. And thank you, ladies and gentlemen, for your participation. This does conclude today's teleconference. You may disconnect your line at this time.