LL Flooring Holdings Inc (LL) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators first quarter 2010 earnings conference call. With us today is Mr. Jeff Griffiths, CEO of Lumber Liquidators, and Mr. Dan Terrell, CFO of Lumber Liquidators.

As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Ms. Jessica Greenberger of Financial Dynamics. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Before we begin, let me take a moment to reference the Safe Harbor provisions of the United States securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

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

Lastly, Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now, I'm pleased to introduce Mr. Jeff Griffiths, President and CEO. Jeff, please go ahead.

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'd like to begin today with a review of highlights of our first quarter performance. Dan will then review our financial results for the quarter and provide an update on our outlook for 2010. I'll then return to update you on our growth strategy before we open the call to questions.

We are very pleased with our strong start to 2010. Throughout the first quarter, consumers continued to respond to our value proposition, and across our organization, our team successfully executed against our long-term strategy. Our never-out-of-stock strategy and our focus on inventory planning allowed us to better meet improving consuming demand in the first quarter and contributed to our successful performance. As a result, we set new company records in sales and traffic, significantly expanding our operating margin and achieved strong bottom-line results.

We believe our results continue to reflect the flexibility and resilience of our business model, regardless of economic conditions. While we are beginning to feel better about where we are in the economic cycle, the improving macro-trends in consumer demand, we remain focused on continuing to increase net sales and profitability by strengthening our position as the leading provider of hardwood flooring. To do so, we are focused on key goals of our long-term strategy, 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 through our commitment to in-stock positions of our top selling products, to leverage our advertising and marketing activities across multiple sales channels to help educate potential new customers about hardwood flooring, and drive repeat customer traffic, and to invest in our infrastructure to generate operating efficiencies and economics of scale that position the company for sustainable growth and operating margin expansion.

In the first quarter, our focus on those key goals enabled us to achieve a total net sales increase of 22.1%, making a record quarter and our first over $150 million. Comparable store net sales increase of 8%, and increase of 20.3% in the number of customers invoiced at comparable stores. A record number of new stores opened during the quarter, and a growth in net income of 36.8%.

We remain committed to delivering our unique combination of price, selection, quality, and availability across our store base, and both our new and comparable stores are performing very well so far in 2010. These store openings, as I mentioned, are a key part of our long-term strategy to grow our sales and market share. 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.

Our new store openings once again contributed to our overall sales increase in the first quarter, and we are on track to achieve our expansion goals for the year, having opened 11 new locations in the first quarter. With two new locations opened in April, we now have a total of 199 locations operating in 46 states.

Consumers responded throughout the quarter to our value proposition, as well as our call-to-action marketing geared toward specific offerings and more consistent in-stock positions, which helped drive our 8% increase in comp store net sales. While we typically don't break out comparable store net sales by month, I did want to note that March, in particular, delivered a strong performance, with comparable store sales, net sales, up 11.9%. March 2009, was the strongest month of the first quarter last year, which makes the double-digit increase of 2010 all the more impressive.

Additionally, we experienced a double-digit increase in foot traffic, which we attribute in a large part to our effective marketing message, (inaudible) with consumers seeking quality and value.

As I just noted, we estimate the number of customers invoiced at comparable stores to have increased approximately 20.3% in the first quarter of 2010, compared to the first quarter of 2009. In the first quarter of 2009, the number of customers invoiced had increased approximately 3.1% over 2008.

We believe our results in the first quarter reflect the beginning of a shift in our business, and I want to spend a moment discussing the trends we are seeing. The strength of our value proposition, including our in-stock strategy, our leadership position in the market, and our successful advertising and promotional campaigns are driving increased traffic and strong top-line growth, and we anticipate those positive trends will continue as we move forward.

We are pleased with the improving consumer demand of our products and the sales trends we are seeing as they play to our strengths. We believe that the impact of our in-stock strategy and focus on continuing to improve our inventory management has been positive. We remain well-positioned competitively from a pricing standpoint as consumers continue to focus on value.

Further, our team is continuing the successful implementation of certain long-term operating initiatives, which are also benefiting our cost structure and will enable us to increasingly leverage SG&A.

As most of you are aware, our gross margin benefited significantly throughout the past year from lower transportation costs, in part driven by the reduction in fuel surcharge from 2008. These lower transportation costs mitigated the increase in costs that resulted from our handling of higher inventory levels and transporting more units.

We are continuing to see customer demand for the higher margin products within our value-priced product lines and sales of moldings and accessories are out-pacing our overall sales growth. However, as anticipated, we are experiencing increased transportation costs in 2010, which are reflected in our gross margin performance. We anticipate gross margin will remain at strong levels. And, as we stated on our fourth quarter call, our gross margin for the full year is expected to be flat to slightly higher year-over-year.

Importantly, the flexibility of our business model gives us confidence in our ability to continue to expand operating margin through growing sales and increasing leverage of SG&A.

Overall, we are very pleased with our performance in the first quarter and the momentum we have maintained. Our record sales and traffic, as well as our ability to deliver significant operating margin expansion, demonstrate that our store model and value proposition are adaptable and resilient across various locations and market conditions.

While we expect there will continue to be challenges ahead, we have a more optimistic view of the macro-economy and consumer demand trends than we did at this time a year ago. With the current strategic initiatives underway in 2010, we are well positioned to continue to enhance our value proposition, grow our store base, gain market share, and drive bottom-line growth.

As part of our strategy, and as you will likely -- as you likely saw in our press release this morning, we are very excited to announce that we are taking our proven and successful business model beyond the US, as we plan to enter the Canadian market later this year. I will speak more about this later on the call.

I'd now like to turn the call over to Dan for detailed review of our financial results and an update on our outlook for 2010, and then I'll return to discuss our long-term growth strategy, including some of our thinking on our international expansion.

Thank you, Jeff. Good morning, everyone. As Jeff mentioned, I'm going to provide some additional details on our results for the first quarter and then discuss our outlook for the remainder of 2010. I'll start with our results for the first quarter.

Net sales for the three months ended March 31st, 2010, grew to $151.2 million, an increase of $27.3 million, or 22.1% over the first quarter of 2009. At comparable stores, net sales increased $9.9 million, or 8%, and at non-comparable stores, net sales increased $17.4 million.

Overall, strong demand for our value proposition has continued to significantly increase the number of customers invoiced, partially offset by a decline in our average sale per customer. Customers have continued to generally prefer product lines with the lower average retail price point, including laminates, though they have also continued to prefer the premium products within those product lines.

In addition, we were able to drive incremental customer traffic through an increased commitment to liquidation deals, a broadened assortment of hardwood at the entry-level price point, and promotional pricing of selected products within our Bellawood enhanced grade line.

We further believe our net sales generally benefited from more consistent, in-stock positions of certain key product lines, including those products in our never-out-of-stock program and our earlier seasonal build in merchandise inventories.

At comparable stores, net sales increased 8% for the first quarter of 2010, which follows a 5.5% increase in the fourth quarter of 2009, and compares to a decrease of 5.8% in the first quarter of 2009. Applying our average sale to comparable store net sales in the first quarter of 2010, we believe the number of customers invoiced in our comparable stores increased 20.3% in the first quarter, which follows an 18.1% increase in the fourth quarter of 2009, and compares to an increase of 3.1% in the first quarter of 2009.

Our average sale in the first quarter of 2010 decreased 10.2% in comparison to the first quarter of 2009, and decreased 4.9% in comparison to the fourth quarter of 2009. In comparing the first quarters of 2010 and 2009, the average retail price per unit sold decreased 11.5%, partially offset by a slight increase in the unit volume per sale.

Our increase in non-comparable store net sales was a result of our continued store base growth. We opened 11 new locations in the first quarter of 2010, and a total of 37 new locations since March 31st, 2009. Of the 11 new locations opened in the first quarter of 2010, six were in new markets and five were in existing markets. Overall, we continue to be pleased with the performance of our new stores.

Gross profit increased 20.1%, to $53.5 million. Gross margin was 35.4%, down 60 basis points in comparison to the first quarter of 2009, and up 10 basis points in comparison to the fourth quarter of 2009. In comparison to the first quarter of 2009, gross margin was primarily impacted by our sales mix and increased product costs. A combination of factors within our sales mix reduced gross margin by a net 10 basis points, and increased product costs, including transportation and finishing, reduced gross margin by approximately 50 basis points.

Gross margin continued to benefit from sales mix gains in the premium laminates, moldings, and accessories, but these benefits were more than offset by our efforts to increase traffic and demand for certain hardwood products, which carry a lower-than-average gross margin. We were successful in driving that demand for hardwood through promotional pricing of certain Bellawood enhanced grade products, as well as the introduction of new domestic hardwood products at the entry-level retail price point.

Gross margin was also impacted by strong customer response to certain liquidation deals that yielded a lower-than-average gross margin, particularly domestic hardwoods and laminates at the entry-level retail price point.

Products increased -- Product costs increased primarily due to transportation and finishing costs. Within transportation, the benefits from lower-than-average international container rates and shipments through our China Consolidation Center were more than offset by increases in domestic transportation costs. These costs increased due to both a per-mile increase primarily due to increases in fuel surcharges, and an increase in the number of miles driven primarily due to a greater number of units shipped from our warehouse to our stores, which we charged to cost of sales as incurred.

In addition, we expanded our assortment of Bellawood products to better meet regional demand, and the unit cost to finish the broadened assortment was greater than the unit cost to finish our historical Bellawood assortment.

Selling, general, and administrative expenses were $42.2 million, or 27.9% of net sales for the first quarter of 2010, compared to $36.3 million, or 29.3% of net sales for the first quarter of 2009. This improvement in SG&A expenses as a percentage of net sales was primarily a result of a 130 basis point reduction in advertising and a slight reduction in legal, professional, and certain other expenses, partially offset by an increase in labor costs.

While our total advertising spend increased 5.1%, we leveraged that increase through more effective delivery of both our branding and call-to-action messages. Our labor costs increased due to a combination of our store base growth, inventory increases, and infrastructure investment.

Other income, which includes interest, was $93,000 for the first quarter of 2010, compared to $122,000 for the first quarter of 2009.

The effective tax rate was 38.8% in the first quarter of 2010, compared to 39.3% in the first quarter of 2009. The 2010 effective tax rate decreased primarily due to lower state income taxes.

Net income for the first quarter of 2010 increased 36.8% to $7 million, or $0.25 per diluted share, based on approximately 28.2 million weighted average diluted shares outstanding. Net income for the first quarter of 2009 was $5.1 million, or $0.19 per diluted share based on approximately 27.2 million weighted average diluted shares outstanding.

Turning now to our balance sheet and cash flow. We closed out the first quarter of 2010 with $50.7 million in total cash and cash equivalents, up from $35.7 million at December 31st, 2009, and $46.1 million at March 31st, 2009.

The inventory balance at March 31st, 2010, was $131 million, representing a $2.3 million decrease from December 31st, 2009. In comparison, inventory at March 31st, 2009, had increased $17.8 million from the balance at December 31st, 2008.

As many of you know, we consider our merchandise inventories either available for sale or inbound in transit based on whether we have physically received and inspected the products.

In the first quarter of 2010, we completed the earlier seasonal build as evidenced through the changes in the inbound in transit inventory. At March 31st, 2010, this inventory had fallen to $15 million from $24 million at December 31st, 2009. In the previous year, the March 31st, 2009 balance had increased to $22.4 million from $13.2 million at December 31st, 2008, as the inventory was still building to meet spring demand.

Our available inventory per store was $589,000 at March 31st, 2010, $588,000 at December 31st, 2009, and $525,000 at March 31st, 2009. The increase relative to March 31st, 2009, results from both the earlier seasonal build, as well as our commitment to the top-selling products in our never-out-of-stock program. As the spring season concludes here in the second quarter, we expect the available inventory per store to range from $530,000 to $570,000, with demand in product availability variations.

Working capital was $128.9 million at March 31st, 2010, compared to $102.2 million at March 31st, 2009, with the current ratio at three times and 2.7 times, respectively.

Capital expenditures totaled approximately $3.6 million for the first quarter of 2010, compared to $1.3 million for the first quarter of 2009. The first quarter 2010 capital expenditures included $1.7 million related to our integrated information technology solution, and each period included 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 now expect sales for the full year in the range of $630 to $650 million, up from a previously expected range of $620 to $645a million. We continue to expect a comparable store net sales increase in the low to mid-single digits, and 36 to 40 new store locations and an approximately equal mix of new and existing markets.

Our revised net sales estimates are primarily based on the consumer demand trends which have improvement throughout the quarter. Further, we have been pleased with the demand trends through our annual April sale which concluded last weekend.

We believe many of the economic indicators associated with the wood flooring market have stabilized from historic lows and continue to gradually strengthen. While we expect continued gradual improvement, we believe the residential flooring market will remain under economic pressure, at least until the second half of 2010.

We expect 2010 earnings per diluted share in the range of $1.13 to $1.23, increased from our previously expected range of $1.10 to $1.20. Our expected range is 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%. This range includes a loss of approximately $0.02 per diluted share related to our planned expansion into Canada. We expect a small number of new stores planned for opening in the fourth quarter to produce solid four-wall profitability even comparable to our current model. However, we expect a loss, as we will not operate for enough store months to cover our initial cost of advertising and infrastructure investment.

We now expect capital expenditures in the range of $17 million to $21 million in 2010, as we adjust for our planned expansion into the Canadian marketplace.

Finally, we continue to expect to be free cash flow positive in 2010, 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 closed out the first quarter and now look to the remainder of 2010, we are continuing to see more positive macro-economic trends and we are excited about the opportunities ahead. The increasing demand that we saw in March continued into April, as we once again had record sales and order results from our recently completed annual three-day big sale in April.

The combination of improved sales trends and strong orders makes us more optimist as we look forward. With our attractive value proposition, proven and flexible store model, and solid financial position, we are well positioned to compete effectively, meet strengthening consumer demand, and grow the business within our highly fragmented market.

We remain confident in our ability to further expand operating margin through growing sales and increasing leverage of our expense structure. We are as focused as ever on remaining the leader in our market and implementing strategic initiatives to continue improving the business.

I'd like to take few moments to provide an update on some of our strategic growth initiatives planned for 2010, that we've discussed on recent calls, and then share with you some thoughts on our planned expansion into Canada. First, we believe our never-out-of-stock inventory program has already positively impacted our business, and we plan to continue this strategy and evaluate it further as we move beyond the significant spring selling season.

We view the increased investment in inventory as low-risk to our business given the relative consistency of our product mix and low-risk of inventory obsolescence. We anticipate this commitment to in-stock positions and key products will enhance our value proposition and be beneficial on continuing to capture additional market share. As we continue to refine this strategy and become more efficient in managing it, we expect available inventory per store will decline after the spring selling season, but generally remain higher than the 2009 levels.

The second strategic initiative that is contributing to our growth in 2010 is our China supply chain initiative. Since launching our pilot program last year, we've made significant progress in expanding the 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 believe that our China supply chain initiative has important long-term benefits, and we are pleased to report that the regions that are being served by the China Consolidation Center, delivered very strong sales performance during the first quarter.

We are continuing to add more stores to the mix and are on track for over one-third of our store base to become part of this initiative by the end of 2010. In addition, we continue to expand the number of products in the program.

Third, we are making steady progress on the upgrade to our technology and systems. This will enable us to further increase the discipline and efficiency with which we manage operations and improve communication across our organization to support our growth plans, including our expansion to Canada. As we previously discussed, this process will happen over time in a way that we believe minimizes risk. We anticipate going live in the third quarter of 2010.

Finally, we expect to continue leveraging our proven store model to further expand our store base. As part of this expansion, we are pleased to be entering the Canadian market later this year. Our entry into Canada is a logical next step in our store opening strategy. Hardwood flooring has a much greater percentage of the overall flooring market in Canada, with over 21% of the square footage in 2009, compared to approximately 14% in the US.

We plan to begin our international expansion by focusing on the greater Toronto area. We believe that our value proposition will be well received in the Canadian market, as the consumer tastes are similar to those of the US consumers, and the establishment of a successful business in Canada is the springboard to long-term international growth.

Our debt-free balance sheet and significant financial flexibility put us in a strong position to execute on the initiatives that I have mentioned today, and to capitalize on opportunities that further increase our market share and drive earnings growth. We are proud of the adaptable business structure, recognized brand, and value proposition that our entire team has worked to build.

And before I turn the call over for your questions, I would like to thank our associates for their ongoing efforts. We will now turn the call over to your questions. Operator.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Robert Higginbotham of Goldman Sachs. Please proceed with your question.

Thank you. Good try on the name. It's Higginbotham. A couple questions, one on sales, one on gross margin.

From what I remember, and please correct me if I'm wrong, last March, March of last year, was significant stronger than January and February, and it looks like you accelerated quite nicely into March of this year. So you're seeing meaningful acceleration on a one-year and two-year basis. And so I'm wondering how to put what appears to be pretty conservative guidance in the low to mid-single digit range in the context of that strong performance. Maybe you can help us with some more color there.

And actually, as part of that, could you talk about why you're deciding to become promotional now as the environment's improving, which could -- appears somewhat counterintuitive. Thanks. I'll follow up with gross margin.

Well, first of all to address your question about the comp guidance, I think you have to go back and look at the comp performance by quarter last year. It was, the weakest comparison was in the first quarter, I think negative 5.8, and then we were negative in the second quarter. We went mildly positive in the third, and then pretty strongly positive in the fourth. So it was a very odd year from a comp performance standpoint. We think that was really more related to the overall economic environment.

So we expect the business to start to more normalize this year, which means that we will be going up against tougher comparisons as we get later in the year. And so that's -- since we're so early in the year, that's kind of the way we're looking at it.

Certainly, if the strong trends that we're seeing from the demand side continue, that could change. But again, we're still pretty early in the year.

And the second part of your question, we have always been very promotionally driven. I don't think there's really been any change to that. I think the main thing is that the consumer certainly seems to be looking more for value today than they were several years ago. And they were looking for value last year, but there just weren't as many of them out there. They were a lot more cautious.

So now what we're seeing is that the consumer's really starting to come back into the market, but there's a different mindset there. They definitely are more price sensitive and they're more driven to value. And I just think that there really hasn't been that much of a change in our strategy. It was pretty much the same as last year, but it's just better traffic and, quite frankly, the inventory levels were better this year than they were last year.

So I think it was a combination of those two things more than a change in our strategy.

Got it. And on gross margin, based on your updated guidance or reiterated guidance, that is for flat to slightly positive for the year, suggests that some of the negative impact that we're seeing or that we saw in 1Q are transitory. And I was hoping you could help us understand what those d rivers might be that abate through the year, that you had this big build in inventory to support your in-stock program, and so those expense distribution costs go away. Is it that you expect to become less promotional? Is it that you expect less liquidation deals? What changes throughout the year?

Well, I think a couple things you have to look at. You have to look at the margin by quarter last. The first quarter margin was 36, which was one of the most difficult comparisons that we had. So that's part of it.

The other part is, we think that the -- with the higher unit sales, we expect that to continue so that the cost of moving additional units probably isn't going to change all that much. But we do expect that it's going to level off, so we're not going to see the big increase that we saw in the first quarter.

Another thing is that the -- certainly, I think there are going to continue to be opportunities to (technical difficulty) as we specialized our product mix or regionalized our product mix, I think that as that becomes more established, they'll be some opportunities for some higher margin specialized products to be sold in those markets. And we haven't really benefited from that at all yet, because we're -- we've really just been rolling that out over the last few months.

Rob, I'd just add in that we do expect some of the benefits that we've gotten from our international container rates to lessen as the year goes on. But we expect the benefit from our China Consolidation Center [plethora] to grow. We do expect fuel, domestic fuel, to continue to adversely impact us. But as Jeff said, we probably could become more efficient in our unit flow. And remember, we charge our cost of sales with the cost of moving product from our warehouse to stores. So as we went through a period of heavier inventory build and a heavier unit flow, that adversely impacted gross margin. We shouldn't see that same impact in future quarters or it should have lesser impact with more consistent inventory levels. (Technical difficulty) That's probably the key drivers.

Great. Thank you very much.

Thank you. Our next question comes from the line of John Baugh of Stifel Nicolaus. Please proceed with your question.

Thank you. Good morning. Congratulations.

Thank you.

I wanted to focus back on that gross margin and a couple of things, one, the international container rate benefit. Everything I read says container rates are way up year-over-year. I assume there's a timing thing there. And then if you could sort of give us, while that becomes, I guess a headwind going forward, the fact you're moving more stores to direct shipping is a benefit. I'm wondering just how those two factors play out.

And then if you could also comment on the gross margin, the impact of rising lumber, what you're seeing in Asia versus here in terms of rising lumber, and then again address the timing of when that flows through your P&L, because you did beef up a lot of inventory, perhaps, before or early on in the rising lumber cost stage. Thank you.

All right. To answer the second part of your question, we have seen some increases in domestic lumber which some of it I think is that there's just -- there was somewhat of a shortage of product, which we expect that probably to alleviate as we go through the year.

I think that there will probably be some selected retail price increases throughout the year. But having said that, I want to make sure everyone realizes that first and foremost we are absolutely committed to being a price leader in the category. But I do think that when you have raw material increases like that, that they affect everyone selling the product. So I think I view that as kind of neutral long term.

As far as Asia goes, we haven't really experienced anything out of the ordinary or anything significant from Asia in terms of price increases yet. But not to say that long term that might not happen. But again, it's neutral because it affects everybody.

And, John, I'll answer the international container rates. In the third and fourth quarter of 2009, we've said that benefit against our average price was roughly up to 60 basis points. We do capitalize that into the unit cost. So it generally takes a quarter, roughly approximating our inventory turn, to hit gross margin.

So there's still a benefit in the first quarter of 2010. We're heading into contract renewal season. That said, there are still additional costs that you have to pay once you exhaust your available space under those contracts. So we started to pay some higher costs even into the fourth quarter, but certainly into the first quarter, that'll roll in in the second quarter, and we should see those costs continue to increase in the third and fourth quarters of 2010.

On the other hand, we expect to get more of an offset in the increased volume through our China Consolidation Center, which will benefit not only our gross margin, but it'll impact some of our labor costs in processing product through this facility as well. So we'll see international costs rise, but we should see -- related to the containers, but we should see an offsetting benefit related to the China Consolidation Center.

Okay. That's helpful. And then, Jeff, I was just curious, with all this discussion and evidence that the high-end consumer's, I don't know if back is the right description, but is certainly spending money, you mentioned the value proposition and the decline in average price per unit or sale. Are you seeing anything within, say your wood category in particular, that suggests that's played out and maybe heading the other direction? Thank you.

The demand or the interest in Bellawood seems to be a bit higher than it was a year ago. It hasn't really translated into sales yet. But some of that's been offset by continued growth of our handscraped business, which has price points pretty similar to the Bellawood. So it's, I'd say it's modest at this point.

Thank you.

Thanks.

Our next question comes from the line of Rick Nelson of Stephens, Inc. Please proceed with your question.

Thank you, and good morning. And great quarter.

Thank you.

Thanks.

Can you speak to the store growth potential you see in Canada and what those say about US store growth opportunities?

Canada's probably, I would say at this point, based upon our experience in the market or my previous experience in the market and what we know, that somewhere in the 30 to 40 store range, but that's really vague at this point. I'd say that a minimum of 30 over a number of years.

But it has -- I think it's important to know that this has absolutely no impact on our growth plans in the US. We still look at the US as roughly about a 400-store market, giving us a market share in the low to mid-20s. So nothing's changed there.

This is -- the strategy to go to Canada now is to really give us the opportunity to learn how to operate our business in an international market and get really good at it there so that long-term we can expand to much larger markets beyond this.

And, Jeff, is the plan to saturate Toronto before you move to other markets within Canada?

I don't know if I'd use the word saturate. But we'll get ourselves very well established in them. Really, what we would look, between Ottawa and Windsor, which is beyond the Toronto market, but geographically pretty condensed and has a significant percentage of the population and wealth of the Canadian consumer.

Okay. Thank you for that. Also, I'd like to ask you for some more color on the China supply chain initiative. How many stores are being impacted at this time? I know you said that a third of the store base by year end. What sort of ramp do you see to get to the one-third, and how many stores eventually would be affected by --

Somewhere -- right now we're probably around 40 stores. And we're adding, I think we'll be adding more stores faster than we thought. And when I say 40, that's really -- I mean, we just added a fairly substantial number over the last few weeks.

I think we probably went through the first quarter averaging 30 --

Yes.

-- or so. And we think by the end of the year we can get it up to about a third, which will be about 65 to 70 stores.

What sort of impact is it having on those 40 stores?

Again, it's very early. The stores we started initially on the west coast, which we started late last year, all had -- the comp store performance in those regions was stronger than our overall company comps. So we feel that the reduced transit time led to better in-stocks in those stores, which led to better sales. And we think that as we expand it to a greater number of stores, we're going to see similar performance.

Thank you for that. Also I'd like to ask you a follow-up on the gross margin, what you're assuming with your flat to slightly higher gross margins about the promotional environment, perhaps as it relates to the first quarter?

The introduction of products in the hardwood lines at the retail -- entry-level retail price point, that impact should continue during the year. We expect a lessening of some of the liquidation deal impact. That varies. Some of the liquidation deals have lower-than-average margin, some will have higher-than-average margins. We just -- we had some deals that the customers responded to that had lower-than-average margins.

We will probably be less promotional in the Bellawood and handscraped lines. Though, if we believe that's going to nurture longer term growth in those lines, we'll still consider promotional pricing.

Very good. Thanks and good luck.

Thank you.

All right.

Our next question comes from the line of Brad Thomas of Keybanc Capital Markets. Please proceed with your question.

Thanks. Good morning, Jeff and Dan, and congratulations on a great quarter.

Thank you.

Thanks, Brad.

Just in terms of following up on the Canada, could you just talk a little bit more about some of the steps that you take as you enter that market? I mean, you mentioned the timing of the opening, the timing of advertising and infrastructure costs will weigh a little bit on the full-year profitability. But do you need any additional infrastructure to operate the stores up there? What other kind of costs and steps are involved as you enter that market?

Yes, there is definitely an investment infrastructure. I feel very strongly that it's important to be established in an international market with a distribution center and a buying staff and a marketing staff so that you can really focus on localizing your business to the market. And I think that is one of the keys to success for a US retailer to expand to another country is to make that kind of commitment. And there's some -- there are a lot of upfront costs to that.

Also, from the technology standpoint, of -- with the investment we're making in SAP this year to do part of that rollout, to have the international function, there's some additional expenses incurred with that. But this is all really important for our long-term growth strategy and will pay dividends for us long-term by making this investment now.

Okay. And then a follow-up to some of the promotional commentary. It's clear you've added a few new products that, perhaps have weighed on the margin. Are you really getting more promotional in other areas, and how are you adjusting things in this environment where you are no longer able to do the no interest, no financing, and now that you have GE as a partner rather than HSBC. Could you just talk a little bit more about the evolution of your promotions and how much fine tuning we may have going forward?

Again, I think going back to our initial comments, that I don't think it's so much of a change in our promotions, it's just that the consumer traffic was up so much and they responded a lot more to it. I mean, we were promoting a lot of the same products we were promoting a year ago at the same price points, it's just a lot more people are buying it.

So can we refine that? Yes. Can we start to mix in some higher price points? Probably we can do that. But we just, we want to make sure that the message that we're giving is what customers respond to. And we still feel like in this environment consumers are being more thrifty and responding more to value. And, yes, we were actually very pleased with the results of our promotions. We were pleased that the -- that we had such strong traffic and strong top-line sales and that we had such strong comp store performance, and that some of the markets that had been struggling have really started to come back.

So we see all those as really strong signs for long term for our business. And if we can continue to grow earnings at the rate we grew earnings in the first quarter, I'm very comfortable seeing some decline in gross margin at -- giving us the opportunity to continue to leverage our SG&A.

Okay. Great. And just a follow-up on that point. As we think about the opportunity to leverage advertising, I believe your guidance for the year had been about 40 basis points of leverage. How are you thinking about that balance of reinvesting in advertising to try and drive even more traffic versus generating some leverage? How are you thinking about that balance looking [toward the rest of the year.]

I mean, we didn't plan to leverage advertising as much as we did in the first quarter. But the strong top-line sales caused it to leverage more than it did. And so that's one of the benefits of having stronger top-line sales is that that's going to happen, you're going to see a stronger leverage in marketing spend.

Brad, I would say we're not planning to spend less in the second, third, or fourth, and we haven't adjusted to spend more. We were pleased with the top-line results we got from the advertising we put in place. We didn't change the timing of any programs. We got the exposures we were looking for. It's just that we had a much stronger reaction to it. So we're still planning the second, third, and fourth quarters as we had originally.

Great. Thanks so much, and congrats again.

Thank you.

(Operator Instructions) Our next question comes from the line of David Magee of Suntrust Robinson Humphrey. Please proceed with your question.

Yes. Hi. Good morning, and good quarter.

Thank you.

Thank you.

Just a couple things. To simplify the promotional commentary, I read the Q. It seems like you got better traffic in the stores and you're trying to get people to trade up, perhaps, to more of the mainline wood products which may carry a lesser margin, but better gross dollars. Is that a simplified way to look at it?

Yes.

And then on the better trends in margin in April, I know that the weather was probably a negative in January and February, you don't really break out the monthly -- the comps, per se. But any way to look at that 11.9 in margin and determine how much of that was sort of pent up from the prior two months?

I think it's safe to say that some of it was, particularly from February. But I think that the greater impact on our March performance was the fact that we moved up our inventory build, because historically, and if you look at the inventory at the end of Q1 '09 versus Q1 '10, we were still building inventory, yet, March, historically, was one of the stronger months for the company. And historically, we were just always trying to play catch-up in March with our inventory.

So this year we entered March with more adequate inventory levels to support the traffic and the potential sales, and that was a real benefit just having the product there physically in the stores really helped drive those sales. And, again, we continue to see that through April.

David, I would add in that none of the months within the quarter were negative, if you back out the nearly 12% in March. We did a mid-single digit in January and February, even though it was being impacted by adverse weather. And while April isn't as strong as March, it's certainly as strong as what we saw in January and February.

Thank you for that. And, lastly, what would be the impact, if any, if the Chinese currency was reevaluated this year, re-valued this year in 2010? Would there be any impact from that?

As you know, we've got long-term relationships with our vendors and mills over there. And while we denominate all of our purchase orders in dollars, it certainly would require a discussion if there were any kind of material revaluation. So it may impact cost. It just wouldn't be dollar-for-dollar and it wouldn't be immediately triggered when there was a change in the value of the yuan.

Is your assumption for the time being, though, that there won't be any material change in that?

That there won't be anything material, correct. Right.

Thank you. Good luck.

Thank you.

Thanks.

Our next question comes from the line of Chris Buss of Thomas Weisel Partners. Please proceed with your question.

Yes. Hello. Congratulations on the nice quarter.

Thank you.

Thanks.

Wanted to ask a little bit about the competitive environment in Canada. Could you provide some color there for us?

Sure. You know what? It's really not all that much different from the US. You have -- there's a home center chain called RONA, which is kind of similar to a Home Depot and Lowe's. Home Depot has a presence there. Lowe's has a very small presence. And then there are a large number of independents.

And so we feel like that we're going to be entering a market that's very similar to here. A lot more domestic product. There's a lot of domestic Canadian product that's produced and sold in the market. Stained hardwoods are much more popular there than they are here. So, but again, it's a good laminate market. And so that's why it's important to really have -- to be established there, to have local people there who get to understand the market and understand the differences and uniquenesses of the market, and then just take our expertise in running the business and our infrastructure and our buying power, et cetera, to help support that operation locally.

Okay. Thank you. And then I hate to come back to the gross margin. But I'm wondering if you can provide a little bit of color for us on how to think about that third quarter comparison with last year, where you're up against the 36.4.

Chris, I think we said at the end of the fourth quarter, that we felt we could get a little bit of expansion in the second and fourth quarters, and we still believe we can. It's going to be very, very difficult to match that number from third quarter '09. But we're still anticipating that for the full year we can approximately last year's -- we can approximate last year's gross margin.

Okay. Thank you very much.

Our next question comes from the line of Laura Champine of Cowen and Company. Please proceed with your question.

Good morning, guys. Lots of puts and takes on AUR with hardwood starting to move higher and still selling lots of the high-end laminates. And I'm just curious when you think that AUR, or your average price point bottoms. And how far down do you guess, at this point, seeing the trends day-to-day, do you think we have to go?

We had expected by this point to have already reached the bottom, and, while not recovering, to be at least bouncing along. So that said, we're expecting Q2 to approximate, if not improve, from Q1, and then to gradually improve as we get the combination of hardwood buyer coming back and the premium laminate buyer continue to remain with us and strengthen. So we had already anticipated it occurring, but we're still looking for that to happen.

Got it. Thank you.

Thank you.

Our next question comes from the line of [Elan Wilson] of [Cyrus] Capital Management. Please proceed with your question.

Hi. First question was, what was the hardwood mix in the first quarter '10 and what was it in the first quarter '09? And second question, could you give us some color on the comps of immature stores and also comps of the mature stores that had a non-comp store in the market and mature store that had no new stores in their market?

A lot of that is what we break out in the K, but we don't break out for the quarters. You can tell by our commentary that we have a bounce-up in the hardwood sales mix percentage, at least due to some of the promotional pricing and then along the lines of deals that improve because of the success of some of those items, even though they had a lower-than-average gross margin.

Comparable stores, we don't break out the maturity on the quarter. Obviously, with an 8% increase, it could not have been carried by just the newer stores, it was across the board, whether they were being cannibalized by existing stores or not.

Are you seeing less or more cannibalization this year since you have said that this year half the stores will be in existing stores compared to a third last year?

Right. Well, that, just that should increase the cannibalization, but that'll be offset somewhat by a larger base that we'll be applying that cannibalization to. So we've said in the past we expect three to five hundred basis points in total comp sales to be related to cannibalization. But we expect that number to head toward the lower end of that range as the base increases.

Okay. Just to clarify. You expect 2010 to be at the lower end of that range?

It varies based on which markets we cannibalize. But just the math of it would tell you that we'd net impacts and we expect, therefore, to move slightly lower, to the slightly lower end of that range.

Thank you.

Ladies and gentlemen, due to time constraints, I will now turn 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.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.