LL Flooring Holdings Inc (LL) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators first-quarter earnings conference call. With us today from Lumber Liquidators is Mr. Jeff Griffiths, CEO; Mr. Robert Lynch, President and COO; and Mr. Dan Terrell, CFO. 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 like to now introduce Ms. Leigh Parrish of FD. 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 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 this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time. Lastly, Lumber Liquidators undertakes no obligation to update any information discussed on this call. And now I am pleased to introduce 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 are Rob Lynch, our President and Chief Operating Officer and Dan Terrell, our Chief Financial Officer.

We had a solid start to the year as we made considerable progress across a range of strategic initiatives during the first quarter. Our store operations have now regained pre-implementation levels of productivity and our team has successfully improved their execution in converting demand to net sales versus our performance in the second half of last year.

Importantly, we believe our value proposition continued to resonate with customers during the quarter. Our first-quarter results improved as we progressed through the period. While we enhanced our execution, some of this improvement in our performance was also seasonal as we approached the stronger spring months. Net sales in late February and March were significantly stronger than net sales we generated in January.

On our last earnings call, we introduced Rob in his role as President and Chief Operating Officer. During the quarter, we also further strengthened our executive team with the addition of Bill Schlegel to the new position of Chief Merchandising Officer. Rob will provide details about some of the team's accomplishments during the quarter in just a moment. But I wanted to note how pleased we are with the significant positive impact these additions to our leadership team have already begun to make to our business.

Both Rob and Bill have leveraged their expertise to make important contributions to the way in which we operate, as well as to the leadership and direction of our stores and supply chain, working closely with our broader management team to improve execution and take advantage of opportunities to further enhance our processes. In particular, our team was able to implement several sourcing initiatives, which helped drive gross margin expansion during the quarter and we anticipate this benefit continuing as the year progresses.

We opened a record number of new stores during the quarter, including our first three stores in Canada in the greater Toronto area. We opened seven of the 16 stores during the month of March alone. These store openings helped drive our top-line results for the quarter, but also had an impact on our expense level versus the same period last year.

Specifically, regarding our entry into Canada, these openings went very smoothly and the stores are performing to our expectations in their initial weeks of operation. Importantly, we implemented the next phase of SAP developed for our Canadian stores and are pleased to report that this implementation went very well with no disruption to our existing operations.

We were opportunistic in opening some of our stores in the first quarter earlier than planned as certain sites became available. While the greater number of stores opened in the first quarter, combined with those planned for the second quarter, will have a temporary impact on our new store productivity and operating margin in the first half of the year, these store openings will ultimately benefit us in the second half of the year.

To provide a brief overview of our results compared to the first quarter of last year, total net sales increased 5.6% to $159.7 million. We opened 16 new stores during the quarter, as I just mentioned. Comparable store net sales decreased 4.3% and net income decreased 17.1%. We have continued to steadily gain traction in our first few months of 2011 and are building off of the momentum that we regained towards the end of 2010.

We continued to make progress in our key growth initiatives while seamlessly addressing some residual challenges related to demand generation that we faced as a result of our systems implementation. Ultimately, I believe we are well-positioned to continue to enhance our value proposition, expand our store base, gain marketshare and drive top and bottom-line growth through the remainder of 2011 and over the long term. I would now like to turn the call over to Rob for more color on our performance for the quarter.

Thanks, Jeff. Now that most of the challenges relating to our system implementation are behind us and we are back to pre-implementation productivity levels in the stores, we are aggressively evaluating opportunities to better serve our customers. This effort is being enabled through the improved information and tools available under our new SAP system.

Looking ahead, the initiatives we developed and began implementing during the first quarter are aimed at raising the bar and being more disciplined in how we execute. Our goal is to achieve operational excellence in all that we do in order to reinforce and strengthen our value proposition for the long term.

While comparable store net sales decreased 4.3% in the first quarter and we continued to experience some residual impact to the business from inconsistent servicing of new demand following the system implementation, we were successful in further strengthening and coordinating our merchandising, marketing and store operations efforts, as well as improving the execution of our promotional activities.

Additionally, we began to undertake several initiatives to further strengthen our in-store operations, including strengthening our point-of-sale retail price discipline. We also launched several sourcing initiatives during the quarter, working closely with not only our merchandise vendors, but also other service providers, including those in transportation to enhance our relationships and performance going forward.

With Bill having joined our team, as Jeff mentioned, we have been able to identify additional ways to improve the Company's supply chain and we are very pleased with the new processes we have already been able to put in place. More specifically, we have implemented regular line reviews to achieve optimal competitive terms across productlines. We are identifying ways to increase direct-from-mill sourcing. We are working with vendors for support of promotions, marketing and store openings and we have enhanced the competitive bidding process for transportation in all other service relationships.

Ultimately, we believe that these processes will be beneficial in enhancing our value proposition of product quality, selection and low prices and will also result in lower net product costs going forward. While these programs are still in their infancy, we are very pleased with the results that we have seen to date. We anticipate beginning to see greater benefit from our efforts as the year continues and we are excited about the opportunities we have ahead of us.

During the quarter, the improvements we made through better execution contributed significantly to gross margin, which increased to 36.2% during the quarter. Note that this margin increase was partially offset by higher transportation costs. However, we continue to leverage our China supply-chain initiative and have made progress with our planned increase in direct-to-store shipments.

Our SG&A expense grew as a percentage of net sales, primarily reflecting higher payroll and occupancy costs as we brought a record number of new stores online in the quarter. As the team has discussed in the past, new store openings are a key part of our long-term strategy to grow our sales and marketshare. We are proud of our low-cost flexible store model and our national advertising campaigns, all of which allow us to quickly generate a strong return on capital when opening locations in both new and existing markets. This increased SG&A expense was partially offset by leverage of our national advertising program as we continue to focus on increasing the ROI of our advertising initiatives.

As we move through the year, we expect customers to continue to respond positively to our coordinated promotions. Additionally, we are developing strategies to improve our operations and value proposition with the intent that these will become part of the Company's DNA going forward. We are pleased that the impact of our sourcing and in-store execution initiatives have begun to take hold and believe that they will continue to benefit our results over the course of the year and beyond. I will now turn the call over to Dan for a detailed review of our first-quarter financial results and our 2011 outlook.

Thank you, Rob. Good morning, everyone. I will provide additional details on our results for the first quarter and then update our outlook for the remainder of 2011. Net sales for the three months ended March 31, 2011 grew to $159.7 million, an increase of $8.5 million or 5.6% over the first quarter of 2010. Growth in our store base drove our increase as net sales at non-comparable stores increased $15 million, partially offset by a $6.5 million decrease in net sales at comparable stores, or 4.3%.

As both Jeff and Rob pointed out, we believe net sales in the first quarter of 2011 continued to be adversely impacted by the inconsistent servicing of new customer demand in the third and fourth quarters of 2010. However, in February and again in March, promotions effectively coordinated across a range of products and services drove increases in both net sales and open customer demand. In fact, as a result of a strong promotion to close March, our customer deposits and store credits at March 31, 2011 were $20.1 million, up from $12 million at December 31, 2010 and $15.1 million at March 31, 2010.

Our average sale in the first quarter of 2011 was $1525 and represented an increase of 5.9% in comparison to the first quarter of 2010, driven by an increase of 6.3% in the average retail price per unit sold, which itself benefited from our sales mix and point-of-sale retail price discipline.

In general, although our sales mix in certain productlines with a lower average retail price point, including laminates and bamboo, has continued to increase, customers preferred the premium products within those productlines. We believe a more consistent in-stock position benefited net sales, including these premium products and further improved the attachment rate of moldings and accessories.

Our increase in net sales at non-comparable stores came from a larger group of stores in 2011 than 2010. Though, on average, the 2011 store was approximately 20% younger than the 2010 store as measured on a month of operation basis. This resulted from the significant growth in store locations Jeff mentioned with 16 new stores opened in the first quarter of 2011, including seven in the month of March. In the first six months of 2010, we opened 17 new locations and only one location was opened in March 2010. As many of you know, our new stores climb a rather steep sales ramp over the first 12 months of operation.

Given our intention of weighting 2011 store openings to the first half of the year, we anticipate the average maturity of a non-comparable store in the second half of 2011 to be greater than the 2010 average. We, therefore, expect greater sales per non-comparable store in the third and fourth quarters of 2011 compared to 2010, resulting in greater SG&A leverage.

At comparable stores, we believe the first-quarter decrease in net sales of 4.3% resulted from a 9.7% decrease in the number of customers invoiced, partially offset by the increase in our average sale. In 2010, an increase in the net sales at comparable stores of 8% had been driven by a 20.3% increase in the number of customers invoiced, partially offset by a decrease in the average sale. Again, we believe inconsistent servicing of new demand in the third and fourth quarters of 2010 adversely impacted the number of customers invoiced in the first quarter of 2011.

Gross profit increased 8% to $57.8 million and gross margin was 36.2%, up 80 basis points in comparison to the first quarter of 2010. Overall, gross margin benefited from our new sourcing initiatives, certain shifts in our sales mix and strengthened point-of-sale retail price discipline, partially offset by higher international and domestic transportation costs and our investment in expanded quality control procedures.

As Rob discussed, gross margin benefited from sourcing initiatives launched in the first quarter of 2011. Certain vendor allowances reduced the total cost of merchandise sold in the first quarter and added approximately 75 basis points to gross margin.

Within our sales mix, gross margin benefited from increased sales of moldings and accessories in certain premium products within our laminate, bamboo and hand-scraped engineered hardwood line. In addition, gross margin benefited from sales mix decreases in certain productlines with generally lower than average gross margins, including liquidation deals in certain solid hardwoods.

As expected, gross margin was adversely impacted by approximately a net 80 basis points due to higher transportation costs, including higher international transportation costs capitalized into our unit costs and an increase in the average cost per mile driven resulting from higher domestic fuel costs. Partially offsetting these higher costs was an increase in direct shipments received by our stores shipped either through our China consolidation center or direct from the mill. In the first quarter of 2011, 20.2% of our unit purchases were received directly at the store, up from 12.2% in the first quarter of 2010.

Selling, general and administrative expenses were $48.5 million, or 30.3% of net sales for the first quarter of 2011 compared to $42.2 million, or 27.9% of net sales for the first quarter of 2010. Overall, SG&A as a percentage of net sales reflects the growth in our store base, including in Canada and the related reduction in the average months of operation. Depreciation of our integrated technology solution began in the third quarter of 2010. The timing of certain promotional programs continued investment in both our store operations and management infrastructure, increases in certain bankcard discount fees, primarily related to the use of extended financing promotions, and increase in certain other expenses, including legal and professional services.

Partially offsetting these increases are sourcing initiatives, including vendor contributions, which reduced SG&A expenses by approximately 40 to 50 basis points. And we continue to leverage our national advertising spend across a larger store base.

The effective tax rate was 38.7% in the first quarter of 2011 compared to 38.8% in the first quarter of 2010. Net income for the first quarter of 2011 decreased 17.1% to $5.8 million, or $0.20 per diluted share based on approximately 28.4 million weighted average diluted shares outstanding. Net income for the first quarter of 2010 was $7 million, or $0.25 per diluted share, based on approximately 28.2 million weighted average diluted shares outstanding.

Turning now to our balance sheet and cash flow, we closed out the first quarter of 2011 with $43.1 million in total cash and cash equivalents compared to $34.8 million at December 31, 2010 and $50.7 million at March 31, 2010.

The total inventory balance at March 31, 2011 was $163 million, up from $155.1 million at December 31, 2010 and $131 million at March 31, 2010. Our available inventory per store was $596,000 at March 31, 2011, down from $611,000 at December 31, 2010, but up from $589,000 at March 31, 2010. Our merchandise inventory is higher than anticipated in certain productlines, including moldings, liquidation deals and engineered hardwoods. We expect these lines to continue to drive sales as the spring selling season concludes in the second quarter. We continue to target available inventory per store to range from $570,000 to $590,000 with demand and product availability variations.

Working capital was $151.7 million at March 31, 2011 compared to $128.9 million at March 31, 2010 with a current ratio at 3.2 times and 3.0 times respectively. Capital expenditures totaled approximately $4.2 million for the first quarter of 2011 compared to $3.6 million for the first quarter of 2010 and included $1.5 million and $1.7 million related to our integrated information technology solution respectively.

Before updating our outlook, please note that our 10-Q filed this morning includes our updated understanding of the matter being considered by the Department of Commerce and the International Trade Commission with regard to certain engineered hardwoods. Since our last earnings call in February, the DOC made a preliminary ruling on certain countervailing duties on March 22, 2011, which took effect prospectively on April 6.

As a result of this preliminary ruling, a portion of our engineered hardwoods are subject to a countervailing duty of 2.25% paid into escrow until a final ruling expected later this summer. The final ruling is expected to define the products' scope still being considered by the DOC, as well as the final rates of any countervailing duties. A preliminary determination by the DOC on antidumping is expected on May 19 with the final rulings also due later this year.

Turning now to our outlook for 2011, we continue to expect net sales for the full year in the range of $700 million to $730 million with full-year comparable store net sales increases in the low to mid single digits. We expect the second quarter to be the last quarter impacted by our inconsistent servicing of new demand late in 2010. As a result, we expect comparable-store net sales in the second quarter to range from low single digit decrease to a slight increase.

We expect to open 24 to 34 additional new store locations over the remainder of the year, weighted to the second quarter and in an approximately equal mix of new and existing markets. We now expect 2011 earnings per diluted share in the range of $1.13 to $1.28, narrowed from our previously expected range of $1.10 to $1.28.

We have increased the low-end of our guidance as we expect continued success from our sourcing initiatives, promotional coordination and retail price disciplines. However, given the expected net sales and pace of new store openings, including additional stores in Canada, we continue to expect second-quarter 2011 diluted EPS to be lower than the second quarter 2010 or at best equivalent. I will now turn the call back over to Jeff for his closing remarks.

Thanks, Dan. We are encouraged by our performance to date this year and we expect to continue building momentum as we move through the remainder of 2011. Looking forward into the second quarter, as Dan mentioned, we may continue to experience some lingering impact from the previous weak demand generation we experienced late last year due to our systems implementation and we remain cautious about macroeconomic challenges that we expect will persist.

However, we believe the customers' shopping experience in our store locations is currently at pre-implementation levels and in some cases even better. Further, we are confident that our value proposition, improvements that we are making in our sourcing programs and in-store operations and our commitment to serving our customers will allow us to continue gaining share in the fragmented hardwood flooring market.

Overall, we have a lot of enthusiasm about the prospects for our business. Our associates are now very comfortable with the functionality of our new system and we have increased our effort towards generating new demand and providing more consistent service to our customers. We began to see more consistency in servicing of demand return towards the end of the first quarter and we anticipate steady improvement as we move into the second half of the year.

As anticipated, the new SAP system is benefiting us through improved reporting. Our associates have access to a much higher degree of information about each store's sales and inventory and generally more insight into the business on a daily basis. As an example, when they sell flooring, the system immediately tells them what moldings should accompany those floors, which is a new feature that was not previously available to us.

Importantly, we are confident that our value proposition and commitment to serving customers, as well as the improvements to our operational execution that Rob discussed, will continue to drive marketshare gains in the fragmented hardwood flooring market. We anticipate further enhancing our capabilities through a number of initiatives as we move through the year and believe that these will continue to contribute meaningfully to our results.

We are continuing to align our marketing and promotional strategies with customers' shopping patterns. We are holding our annual big sale this weekend, a week later than last year due to the Easter shift. We feel good about how we are positioned going into the event with our product selection and availability, promotions, our ability to serve our customers and our retail pricing discipline.

We are off to a strong start in terms of new store openings and continue to expect to open 40 to 50 locations in 2011. We see an opportunity to maintain this increased level of openings on an annual basis in the future. We anticipate that approximately 35 to 40 of our openings will be in the US this year with the remainder in Canada. To date in the second quarter, we have opened three stores with one in Canada.

Looking ahead, our focus has not changed. We anticipate continuing to further strengthen our operations by maintaining a greater commitment to pricing discipline and consistency, continuing to improve our in-stocks and merchandising presentation and leveraging processes that better support our never out-of-stock strategy, enhancing attachment rates for moldings and accessories and increasing direct-to-store deliveries, including continuing to effectively execute our China supply chain initiative under the oversight of our planning and allocation teams.

We expect these initiatives to contribute to overall improvement in our performance and result in operating margin expansion for the full year compared to 2010. Notably, the net sales and earnings we are expecting for 2011 translate to double-digit top and bottom-line growth. We are confident that the improvements we have been making to our business, coupled with our strengthened management team, put Lumber Liquidators in a strong position for growth going forward.

Importantly, we remain committed to further enhancing our value proposition, to improve our competitive advantage and expand our marketshare. Our debt-free balance sheet and financial flexibility give us the right foundation to execute on the initiatives that I have mentioned today.

As we look to the remainder of 2011, the key goals of our long-term strategy continue to be to gain marketshare in the highly fragmented flooring market through the growth of our store base in both the US and Canada, 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 in all of our markets about hardwood flooring and drive repeat customer traffic and to invest in our infrastructure to generate operating efficiencies and economies of scale to position the Company for sustainable growth and operating margin expansion.

Before we 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 for your questions. Operator?

(Operator Instructions). Brad Thomas, KeyBanc Capital Markets

Thanks, good morning. I wanted to just dig into some of the sales trends. First of all, your commentary was certainly helpful. Could you speak a little bit more to just what you are seeing in terms of the underlying demand from your customers, what you saw intraquarter in terms of the number of orders placed and then how much of a pickup we saw through the quarter and what level of tailwind you may have in the second quarter from customer deposits? And obviously, there are a lot of moving pieces, here so if you could just help to put a little bit more context around what you are seeing, that would be very helpful.

Sure. Well, first of all, keep in mind, historically, in the first quarter, January has historically been the weakest month and then March has historically been the strongest month primarily because of the seasonality and more home improvement work happening in the spring and that type of thing.

So you put on top of that some of the overhang we had coming out of last year from the systems implementation. This year was even more pronounced, that January was by far the weakest month and March by far the strongest month. And one of the things that made us feel good about the trend was that the build in deposits, as I think Dan had mentioned, most of that happened in the latter part of March. So we thought that bodes well for a strong demand as we move into the second quarter.

And I recognize you have given a range of guidance for the second quarter, but did comps move into positive territory by the end of the first quarter?

Comps in March were positive, yes. But again, keep in mind that March historically has been the strongest month and there was some pent-up demand from earlier in the quarter that we probably would have normally filled in January or February.

Got you. Okay, thanks. And then to dig in on the expense side a little bit more, above and beyond your normal store openings, you obviously have a couple of areas that have required a little bit of an extra level of expense in terms of the entry into Canada, SAP and some of the legal expenses. Could you help to just maybe split apart what level of incremental investment has been necessary for those different initiatives and what your expectations are on the expense front going forward?

We are probably not going to break it apart in too much more detail. You have seen the impact on depreciation now for a couple of full quarters related to the integrated technology solutions. So that will give you the cadence that we expect to follow going forward.

New stores, certainly heavier brought within payroll and occupancy costs. In the occupancy line, they are by far the driver of the deleverage there. That will give you an idea of what occupancy reaction is to that new store growth. We expect that to turn around in the second part of the year.

Legal and professional have some fees that relate to SAP, our technology solution. There are some other matters that we do not expect to continue into the second half of the year, but we haven't broken those out specifically.

Okay, and then just lastly to clarify on the mix and the ticket, if I heard you correctly, I think that the ticket was down again this quarter. I think if I remember correctly, in fourth quarter, it had been up year-over-year. What is it that you are seeing in terms of that average ticket in the hardwood customer? Was last quarter an anomaly or has something changed just in terms of what you all are doing in the store?

The ticket trend still remains up on a year-over-year basis. We see the customer continuing to offer the premium products, albeit in some of the lower average retail lines. Ticket I think was down a little bit from Q4's ticket, but part of that is a seasonal shift. So on a year-over-year basis still positive.

Traffic was down almost 10% in Q1. We attribute some of that to the hangover, if you will, from inconsistently servicing the demand in Q3, Q4. Q4 was aided a bit by the build in open deposits coming from Q3. So you really need to sort of look at that period all as one. It makes it look like this was a sequential decline, but actually we were fairly pleased with the ticket and traffic that we saw.

Got you. I may have misheard you say sequential then. All right, thanks so much. I will turn it over to somebody else.

Matthew Fassler, Goldman Sachs.

Thanks a lot. Good morning. I have a couple of questions for you. First of all, can you repeat the comment that you made on the impact of vendor allowances on gross margin, please?

A benefit of 75 basis points.

And can you give us some color on sort of where that came from, how typical is that and how sustainable is that level of vendor support?

Hey, Matt, this is Rob. It came from a number of different areas as we have increased the rigor and discipline on how we source everything from, as I mentioned, product purchases, as well as any services, supplies and you name it. So we got some short-term benefits here, but the overall theme is a long-term theme. There is opportunities going forward and we are just really kicking off a process here that is going to be multiyear and it is going to be built into our DNA in general.

And some of it came from basic supporting of promotions that we -- the coordinated promotions that Dan talked about that we pushed into February and March came from just better negotiations, line review processes, bringing in some more competitiveness into our process as we buy.

So as we think about your upcoming quarters and upcoming years, should we look for vendor support at least as you sort of get to what you consider to be best in class to be a consistent theme as we think about your margin build?

Yes, it is a key part of our -- as part of our merchandising, we have a key part is going to be margin enhancement along the way and again, really -- but the overall goal in business to being in line with our -- to be in line to strengthen and support our value proposition so that we ensure that we are getting the best price out there, that we are the low cost provider and that we are passing that onto the customer and maintaining our advantage out there.

Got it. Okay. I guess my second question relates to the relationship between customer deposits and inventory. One would think that as your deposits -- one reason your deposits would be up is if you were waiting to fulfill goods and it seems like you essentially have the goods to fulfill. I am wondering if there is a mismatch of what you have in stock relative to where demand has been or whether I am misunderstanding what the relationship between deposits and inventory should be.

Actually we are quite comfortable with where the inventory is, that the investments were in our best-selling products and a lot of the build in deposit, as we said, came in late March, so they are pretty fresh and we should be able to fill them as we move through April. So again, we felt that the inventory levels on a per store basis is down from where it was at the end of the fourth quarter, down from where it was at the end of the third quarter last year. So we feel we're on the right track with inventory. We feel average inventory per store will continue to climb as we move through the year and that, again, this build in deposits was primarily in the latter part of March. So we view it as a good thing.

Got it. And I guess my last question for now relates to essentially the nonproduct costs and services cost and I guess I really should have asked it after the first question because, Rob, you introduced this into your answer. What is your total spend on the nonproduct side and how would you quantify the opportunity you have for efficiency in that arena?

I don't know about the total opportunity. We got 40 to 50 basis points of benefit related to promotional allowances, new store opening allowances, additional assistance on financing of some of the promotional programs. So there is opportunity in a number of line items. We were pleased with this as a start. But just as Rob said, I think this will be a part of our DNA going forward as well.

And that would be where the -- the vendor rebates are part and parcel of that discussion it sounds like.

Our vendor is participating with us.

Got it.

I would like to add one thing to that. The discipline is going to be around everything we are doing. So the mention then relative to our advertising spend and the leverage there, the focus going forward is going to be definitely focused around ROI. So even that spend there, how are we buying, how competitive are we, are we getting the best pricing possible. So again, the disciplines we are bringing into the product side, we want to make sure we are doing it across the business in everything we do from real estate, occupancy costs, legal fees, you name it.

Understood. Thanks, guys.

Jarrod Rapalje, Longbow Research.

Hello?

Budd Bugatch, Raymond James.

Good morning, Jeff. Good morning, Rob. Good morning, Dan. It is actually TJ McConville filling in for Budd this morning. I want to try and piggyback a little bit on Brad's question from earlier on the traffic and the ticket. So Dan, it sounds like, from your commentary on the SAP impact, just enlighten me as to what is baked into your full-year sales or comp expectation from a traffic and ticket perspective. Do you expect this ticket increase to carry out throughout the rest of the year?

We do. Our comp increase for the year was based on both ticket reinflation and traffic increase, so a slight increase in both of them to get the comp store increase for the full year. We just understood we were going to have additional challenges here in the first six months of the year coming off of the implementation servicing issues.

That's helpful. And can you folks talk about the availability of financing maybe through your third-party partners? And you eluded to it earlier, Dan, in some of the gross margin benefits, but how is that impacting the ticket and how is that impacting your customer behavior?

We think it provides some incremental sales. We have offer six months on a regular basis. We increased that to 12 to 18 months for certain promotions, including the real exciting promotion we offered at the end of March, which drove that open demand. We had a combination of product, as well as installation services, as well as financing options available to the customers. So we believe that helped incremental business. We have actually seen our approval rates under that program continue to improve slightly, so we have been pleased with the benefit that it has given to the customer.

Okay. And lastly for me on just the competitive environment, have you seen any increased responses from any of your competitors, any changes there that we should be aware of?

Nothing significant. Just as we have said over the last couple of years, we think that the big-box retailers are paying more attention to the category. But actually one thing we have noticed is that they seem to have less inventory or less offerings in some of the higher priced products. So we think long term that will help us.

Okay, guys, thanks very much and best of luck on 2Q and the rest of the year.

Matt McGinley, ISI Group.

Good morning. A question on the traffic decline you had in the first quarter and you said that it was the inconsistent service levels that you experienced in the back half impacted traffic in the first half. Can you walk me through how that would impact the average customer who may or may not have been able to receive the product that they wanted in the back half? How does that translate to transaction weakness in the first half of this year?

This is really, and we have discussed this late third and fourth-quarter calls from last year. One of the disruptions that we experienced as we went through the implementation last year was that, as the store staff was focused on getting familiar with the system and dealing with existing orders and product visibility and that type of thing, is that all of our sales generation demand metrics declined and that was primarily working with new customers who come into the store because, remember, keep in mind the buying process for flooring for most customers is extended over a period of time. It requires several visits to the store.

So these people are coming in the store, we weren't paying as much attention to them, we weren't giving them the samples that we normally did. We weren't getting their contact information and all that is so important, the key to creating future demand and future business. So when those metrics declined in the back half of last year, there was a void of new demand customers in the latter part of last year and the early part of this year.

So we got back on track with that by the end of the year last year and that is why we feel good about our improving prospects now and as we move through the second quarter, but there just weren't enough customers in the queue there that we could call and entice to come in when we were running a special promotion, etc. and that led to the decline in traffic.

Got it. And so as you think about that going into the second quarter and the third quarter, now that you have these systems back up in place, would you still have probably negative traffic in the second quarter and then that trend would probably reverse as these systems are brought back online or working the way you intend?

Exactly. We think that a little bit of an overhang still in the second quarter, not near as bad as what we had in the first and then we expect the back half of the year, as Dan said, both traffic and ticket to be positive.

Okay, great. And then this is more of a big picture question, but as you estimate the geographic reach of the store base, how do you know when you stop in a market? I think you said that half of your stores this year are going to be in existing markets versus old markets. I am just wondering how you think about that in terms of when you would stop in a given market.

We don't think we have completely saturated any of the major metropolitan areas. We still feel that there are opportunities in every one of them. Some of them are still pretty substantial. So it is really a secondary or tertiary market where we have one store that we probably would not add a second store, but really if you focus on the major metropolitans, there is still a lot of room to grow.

Great. And then do you think you had any inflation in the comp in the first quarter or was this pretty much all traffic and ticket?

Traffic and ticket. We really didn't have an increase in the average retail offer.

Great, thank you very much.

Jarrod Rapalje, Longbow Research.

Hi, guys. Sorry about that earlier. Just on new store productivity, can you guys talk about how the new stores that are opening with SAP implemented at the outset, how that kind of compares to new stores last year prior and kind of the productivity difference there?

We are pleased with the performance as they have opened. The maturity has had an impact on the overall new store productivity and we should see that turn around in the back half of the year, but as far as new stores opening with SAP, we haven't seen any interruption because of SAP. Hard to say until we get a little more month of operation to determine whether that is going to actually change the ramp, but we certainly don't see anything adverse there.

Okay. And then on laminates, I noticed that is now up to 24% of sales and that is up pretty sharply from last quarter. Is this mostly -- you guys are just continuing to emphasize laminates sales or are you continuing to see a shift of the customer or any patterns that are changing there?

I think we featured in some of the promotions. Because of the interruption in the sales cycle, I think you would expect those that probably have a shorter planning cycle to come back first in laminates and bamboo might fit that. But certainly we think we have expanded the product assortment and are appealing to a greater customer base.

Okay, thanks, guys.

John Baugh, Stifel Nicolaus.

Good morning and thank you for taking my questions. Just to be clear, the vendor support, which is both in SG&A and gross margin is in that, what, 120 basis points range combined and that is year-over-year?

Correct.

Got it. Super. Congratulations on that. And the build in customer deposits was almost exclusively due to the late March promotion and not some SAP issue?

Correct.

That's right.

Okay, super. Is the flyer out for the weekend event yet?

I think the postcards dropped yesterday. We are pretty excited about it.

They have been dropping, yes.

Okay, is that on the Web as well?

It will be as of Friday.

Okay, yes, I didn't see it on Friday. Okay. And then you may want to dodge this one, which is fine, but I was just curious when the dumping decision comes out, whether there is a victory neutral or a tie or a loss percentage that comes out, how you'd view whatever percentage comes out.

I think it is probably still too early not have -- I don't know if we can strictly go on a percentage. We have to understand all the ramifications of it. I think we have got several different strategies to react to it depending on what they are. So I would say it would be hard to peg a number and say we are happy or not happy. Obviously, if there is no duty, we are happy. But if there is -- I mean dumping. If there is some -- we could be able to -- we assume we will be able to figure out ways to work around it. We have got flexibility that there are other sources we can go to. Certainly, I think we can leverage with our vendors if necessary and if it is way too high then I think the customer will just make choices to buy other types of flooring.

Got it. And then lastly on mix, I forget when it was precisely, but you had talked about wood coming back a little bit and that seems to, in your mix, reverted back a little bit. I'm just curious whether that's what you just discussed in the last question or do you see any trend back to wood at the lower or middle or even higher price points within wood.

Higher price points in wood are still kind of weak. When we do sell it, it tends to be when we are promoting it at pretty aggressive pricing. Most of the wood sales are at lower price points still and that is a trend that we saw for most of last year as well. We have changed our product mix. We have expanded the laminate, we have expanded the premium bamboo. So we think we have good strategies in place to compensate for the weakness in the higher ticket wood. We are probably in a better position than most of our competitors are to take advantage of that trend.

Thank you, good luck.

Rick Nelson, Stephens Inc.

Hi, good morning, guys. This is Nate Mendez in for Rick. Just a quick follow-up on the comp commentary. You mentioned that the comp turned positive in March. And I was just wondering how much of that, if you can tell, was newly written business versus fulfilling orders?

For the most part, though we still had a little bit of overhang in Q4 from the SAP implementation, we reached a historic norm and a historic norm in the freshness of those open orders during the first quarter anyway. So I wouldn't say much related to March. I mean we drove a lot of demand with some exciting promotions in March. But as Jeff said, some of that is related to January, February where we had weather, the tax refund delays and a number of events that pushed some demand from those early months into March.

Okay. And then you said most of the customer deposit was built up in the back part of March, so it was probably trending closer prior to that to the fourth quarter deposit level?

We had actually returned to our historic norm as far as customer deposits. We were comfortable with the freshness that was in there and then kind of rebuilt a stronger balance with the March promotion.

Got you, got you.

Dan, I would like to add something. This is Rob. The points we made on the coordination of our merchandising, marketing and store operations efforts is really a part of this as well as we did a couple of our big events, as Dan mentioned, in February and March. We integrated those strategies from each of the departments and got a better return, really a better effect, a better execution and a better ROI on the events. Some good learnings came out of that that we are going to apply to the balance of the year.

Okay, got you. Thank you for that. And then I appreciate the color you gave us on the new supply chain processes. I was just wondering if you could go into a little bit more detail on each of the efforts and I guess what you see as the greatest potential lift to gross margin on those fronts.

I would say there are no silver bullets. Again, I want to reiterate that it is driven by our overall business of strengthening our value proposition and then digging in and looking at how we can continuously improve how we source, how we operate, how we get better costs and it is going to come across -- what we are doing is applying best practices across from the industry on how we work with our vendors and how we source either product or nonproduct-related purchases.

And within the margin side, it will come from a number of things, including, like I mentioned, just competitive line review processes, partnering with our vendors better on support of promotions, new store openings and new store allowances as well. There are opportunities within our supply chain there, transportation rates, how we negotiate and manage that bid process as well. So it will be a structured process, it will be over time, it is not -- we are not looking at it as a short-term one-time event. We are looking at it as something over time that will be part of our DNA and that we will be very systematic about.

Got you. So there is no one area where you see a significant low-hanging fruit more than others?

Like I said, one of the things in retail, there is no real silver bullets, but it is just in the details and it is going to come from 10 different areas pretty much is what I would tell you.

Okay, great. Thank you very much and good luck with the quarter.

David Magee, SunTrust Robinson Humphrey.

Yes, hi, guys, good morning. Most of my questions have been asked, but just I am curious still about where prices are moving this year. To the extent that you do have some higher input costs, what kind of flexibility do you have? And then I guess conversely, when you do promote and maybe cut some pricing, how much of a reaction are you getting to that? I am just curious how sensitive your customers might be to that process.

Well, I think that if you think about some of the stuff we talked about on the call today, we certainly feel that we have opportunity to leverage our relationships with our vendors. We have opportunities to leverage our growth with our vendors and I think that, with Rob and Bill being on board, it is an example of continuing to build our infrastructure to support our growth.

So I think that the experience and the knowledge that they bring to the table is going to help us offset what might be some input cost pressures that would be felt otherwise. So we think we can more than neutralize that; we can use that to our advantage. And I think Rob had mentioned this earlier that we are -- part of this is we are going to work to get better costs and we are going to be able to -- we are going to be able to benefit from that, but our customers will be able to benefit as well as we are going to pass some of these savings on with better pricing, which again just helps to strengthen our position within the marketplace and our value proposition. So we feel -- back and answer your question -- we feel we can more than offset any pressure on input costs.

Thanks, Jeff. So what you are saying is, for the entire year, your average price might be a little less than it was last year? Just to simplify (multiple speakers)

That is what we are hoping for, yes.

(multiple speakers) Okay, great. Thank you and good luck.

All right, thank you.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Thank you for joining us on the call today. All of us look forward to speaking with you again soon and keeping you updated on how we are doing in achieving our objectives throughout the year. Thank you.

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