LL Flooring Holdings Inc (LL) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators Second Quarter Earnings Call. With us today from Lumber Liquidators is Mr. Jeff Griffiths, CEO, Mr. Rob 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 now would like to introduce Miss Ashleigh McDermott. Please go ahead.

Good morning everyone, and thank you for joining us today. Before we begin, let me take a moment to reference the Safe Harbor provisions of the United States securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating financial performance of Lumber Liquidators.

Although Lumber Liquidators believes that 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.

Good morning, everyone. Thank you for joining us for our earnings call today. Rob Lynch, our President and Chief Operating Officer and Dan Terrell, our Chief Financial Officer are also both on the call with me today.

As noted in our release issued this morning, second quarter top line and comparable store net sales results were in line with the revised expectations we had discussed with you on a recent business update call, and our bottom line results hit the mid-point of our anticipated range for the quarter. Dan will provide more detail on our results, but I would first like to touch an a few high-level points.

As we have indicated previously, our net sales in the second quarter were impacted as we saw consumers become much more price sensitive and cautious in their spending. We believe large ticket discretionary purchases have been impacted by increases in fuel prices, continuing high unemployment, and general consumer uncertainty about the future macro environment.

However, we are pleased that our net sales are continuing to benefit from the more consistent in stock positions we are taking in certain key product lines, such as laminates, moldings, and accessories.

In addition, our annual Big Sale drew a strong customer response, due to the strength of our value proposition, and targeted promotional pricing, although promotional pricing did temper our gross margin.

Overall during the quarter, while orders were strong, a greater percentage of our net sales were realized during our promotions, and we increased promotional activity to call customers to our stores. We believe the increased orders during our sale events were due in part to more aggressive sample distribution and follow-up efforts by our store associates in relation to these events.

In addition, contrary to past consumer trends that we have experienced, we have seen customers beginning to leave orders outstanding for longer periods of time, choosing instead to take advantage of values offered at the order date, then delaying before completing the orders. This underscores the notion that consumers are much more value-conscious, a trend that we believe will stay with us for some time.

As we discussed previously, we added promotional events during the month of June that were incremental to the prior year. While these did not draw the invoice sales we expected, our open order balance at the end of the quarter was up 38% versus June 30 of 2010. We are encouraged by this high open order balance, which along with increased catalog and sample requests indicates that there continues to be strong customer demand for our value proposition.

Going forward, we plan to continue to direct sales associates' efforts toward sample distribution and customer outreach, while adjusting our promotions to focus more on a reduced number of key items, but aggressively low price points. One final note that I would like to make. We are executing at productivity levels that meet or exceed the service and execution offered prior to the implementation of our technology solution last August.

We recognize that our business is currently facing macroeconomic challenges. However, as we approach the anniversary of the implementation, we are pleased that we have begun to see the benefits of our technology solution with enhanced tools as well as increased visibility into our business that it provides.

We are aggressively focused on improving our value proposition, an example of which is the reintroduction in June of our Bellawood product with a new and improved finish that has a 100-year transferable warranty that distances our offering from the competition. We also remain focused on enhanced marketing and efforts to cultivate customer interest, ultimately converting that demand into invoiced sales. I would like to turn the call over to Rob for more color on this.

As we discussed on our last call, we have continued our long-term investment in certain key areas of the organization that we believe will contribute to our value proposition for years to come. Let me quickly review some of the progress made to date, and what we see as our path forward.

During the first half of 2011, we began to lay the groundwork for several key strategic initiatives, which will provide benefits as we continue to grow the Company for the next several years.

First, we have strengthened our merchandising team. For the first time, we have leadership in our merchandising organization with significant on the ground experience in developing world-class global sourcing capabilities.

This gives us the resources and opportunities to expand our relationships with our mills in both China and Latin America, which will strengthen our competitive advantage, and enable us to command better pricing on a broader mix of products. We are beginning to benefit from the team's work with vendors for support of promotions, marketing, samples and store openings, as well as enhancing the competitive bidding process for transportation and other service relationships.

As a result of these initiatives going forward, we will be able to strategically lower some retail prices to become even more competitive while at the same time enhance our gross margin. We will continue to both develop and seek the talent and resources necessary to support the implementation of our sourcing initiatives.

Additionally, we enhanced our product allocation team during the quarter and expanded the distribution resources to better take advantage of our logistic alternatives and scale. The expansion of our new Hampton distribution center, together with our new system and process improvements, will allow us to more efficiently fulfill customer orders, and maintain in stock needs as part of our Never Out of Stock initiative.

We completed our first strategic line review of the laminate merchandise category in the second quarter, where competitive bids were solicited for products in the key merchandise area. As the process concluded, we broadened and diversified our supply base and product assortments, both domestically and internationally. As a result, we were able to reduce product cost across the board, and significantly in some cases.

We will be conducting the next strategic line review in a major product category in just a few weeks. Our merchandising teams and existing and potential new vendor partners are preparing for this as we speak. We will keep you posted as we move forward on this important strategic initiative.

Finally, with the addition of a new strategic partner, we have enhanced our new store site selection analytics, and tools and process. As a result, we expect to yield benefits from these new tools in the future. Overall we believe that we will continue to have opportunities through our new sourcing and marketing initiatives to strategically lower retail prices, becoming even more competitive while enhancing gross margin towards the end of 2011, into 2012 and beyond.

Ultimately, we believe that the improvements we have been making to our business will further strengthen our value proposition, continue to contribute meaningfully to our results, and allow us to execute on our long-term growth strategy. I will turn the call over to Dan for a detailed review of our second quarter financial results, and our 2011 outlook.

I will provide additional details on the results for our second quarter and then discuss the outlook for the remainder of 2011. Net sales for the 3 months ended June 30, 2011 totaled $175.5 million, an increase of $6.8 million, or 4% over the second quarter of 2010. This increase was due to our store base growth, as net sales at non-comparable stores increased $20.1 million, partially offset by a $13.3 million decrease in net sales at comparable stores.

As Jeff pointed out, we believe the weakness in our second quarter net sales resulted from an already value-conscious consumer becoming more price sensitive and cautious with regard to large ticket discretionary purchases for the home.

This caution, coupled with the impact of opening new store locations in existing markets, resulted in a 7.9% decrease in net sales at comparable stores as the number of customers invoiced decreased 7.5%. In the second quarter of 2010, net sales at comparable stores increased 5.5%, and the number of customers invoiced increased 7%.

As most of you know, we believe our stores open for more than 36 months are more likely to be adversely impacted by the opening of a non-comparable store in an existing market. To provide you with more detail on our net sales at comparable stores, excluding the net sales of markets which include a non-comparable store and at least one comparable store older than 36 months, our total net sales at comparable stores decreased approximately 4%.

Our average sale in the second quarter of 2011 was approximately $1,525.00, a decrease of approximately 40 basis points from the second quarter of 2010, and equivalent to the first quarter of 2011. Our net sales at non-comparable stores came from a larger group of stores in 2011, than in 2010.

Based on a months of operation basis, the average non-comparable store in the second quarter of 2011 was approximately 20% younger than the average non-comparable store in the second quarter of 2010. This resulted primarily from the opening of 27 new stores in the first half of 2011, versus 17 in the first 6 months of 2010.

As many of you know the 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. As a result, we expect greater sales per non-comparable stores in the third and fourth quarters of 2011 compared to 2010, resulting in greater SG&A leverage.

Gross profit increased 2% to $59.7 million while gross margin was 34%, down 70 basis points in comparison to the second quarter of 2010. Overall, gross margin was adversely impacted by a greater proportion of net sales at promotional prices and higher transportation costs, partially offset by benefits from sourcing initiatives and net sales mix shifts. Our second-quarter gross margin has historically been weaker than the first quarter, due to our April Big Sale, our broadest chain-wide sale event.

The 2011 event concluded in May, due to the shift in the Easter holiday, slightly more than a week later than the conclusion of the 2010 event. Additionally, our second quarter net sales in the weeks prior and subsequent to our April Big Sale were weaker in 2011 than in 2010.

As a result, a greater proportion of our 2011 second-quarter net sales, particularly those in April and May, were a result of the Big Sale and, therefore, at more promotional prices, resulting in an adverse impact on second-quarter gross margin of approximately 40 basis points.

As expected, gross margin was adversely impacted by approximately 60 basis points due to higher transportation costs, including higher international transportation cost capitalized into our unit cost and an increase in the average cost per mile driven resulting from higher domestic fuel costs. Partially offsetting the 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 second quarter of 2011, 27.3% of our unit purchases were received directly at the store, up from 13% in the second quarter of 2010. In addition, gross margin was adversely impacted in comparison to the second quarter of 2010, due to our increased investment in quality control procedures, particularly certain international efforts.

As Rob discussed, 2011 gross margin continued to benefit from our initial sourcing initiatives, adding approximately 50 basis points to gross margin in the second quarter. These included vendor reimbursement for samples cost, volume allowances, and participation in specific promotional programs.

Within our sales mix, gross margin benefited from increased sales of moldings and accessories, and certain premium products within our laminate and bamboo lines. In addition, gross margin benefited from sales mix decreases in certain hardwood product lines with generally lower than average gross margins.

Selling, general and administrative expenses were $51.1 million, or 29.1% of net sales for the second quarter of 2011, compared to $43.9 million or 26% of net sales for the second 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 average months of operation; incremental promotional events; depreciation of our integrated information technology solution begun in the third quarter of 2010; continued investment in both our store operations and management infrastructure; increases in certain bank card discount fees, primarily related to greater use of extended financing promotions, and increases in certain other expenses including legal and professional services.

Partially offsetting these increases are sourcing initiatives including certain vendor contributions which reduced SG&A expenses by approximately 10 to 15 basis points. The effective tax rate was 39.5% in the second quarter of 2011, compared to 38.6% in the second quarter of 2010. We now expect an annual effective tax rate of 38.9%.

Net income for the second quarter of 2011 decreased 41.9% to $5.3 million or $0.19 per diluted share based on 28.4 million weighted average diluted shares outstanding. Net income for the second quarter of 2010 was $9.1 million, or $0.32 per diluted share, based on approximately 28.3 million weighted average diluted shares outstanding.

Net sales related to our Canadian operations were approximately $1.6 million and our net loss in the first full quarter of operations was approximately $0.02 per diluted share.

Turning to our balance sheet and cash flow, we closed out the second quarter of 2011 with $33.4 million in total cash and cash equivalents, compared to $34.8 million December 31, 2010 and $42.2 million at June 30, 2010.

The total inventory balance at June 30, 2011 was $182.3 million, up from $155.1 million at December 31, 2010 and $143.1 million at June 30, 2010. Our available inventory per store was $631,000 at June 30, 2011, up from $611,000 at December 31, and $584,000 at June 30, 2010. The increase in available inventory per store is primarily due to weaker than expected net sales.

Available inventory levels are also higher in certain merchandise categories, including moldings and accessories, certain engineered and exotic hard woods, and liquidation deals due to a combination of our commitment to strengthening in-stock positions, new product launches, and opportunistic purchases designed for future periods. We continue to target year-end available inventory per store to range from $570,000 to $590,000.

Working capital was $157.9 million at June 30, 2011, compared to $137.7 million June 30, 2010, with the current ratio at 3.2 times and 3.3 times respectively. Capital expenditures totaled approximately $4.1 million the second quarter of 2011 compared to $4.8 million the second quarter of 2010 and included $700,000 and $2.9 million related to our integrated technology solution respectively.

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 hard woods. Since our first-quarter earnings call in April, the DOC made a preliminary ruling on certain anti-dumping duties on May 20, 2011 which took effect prospectively on May 26, and on June 20, 2011, amending certain rates. As a result, a portion of our engineered hard woods are subject to anti-dumping duties of either zero or 6.78%, paid into escrow until a final ruling is made.

The final ruling, due to be released in the fall, is expected to define the product scope and set the final rates of both countervailing and anti-dumping duties. Based on these rates and our current sourcing structure, this matter is not expected to have a material adverse effect on our results of operations.

Turning now to our outlook for 2011, which remains in line with the update we provided earlier this month. We expect full-year net sales will range from $670 million to $700 million, with full-year net sales at comparable stores decreasing in the low single digits. We expect net sales in the third quarter to range from $165 million to $180 million, and with the maturity of our non-comparable stores, net sales in the fourth quarter to range from $170 million to $185 million.

We expect to open 13 to 17 additional new store locations in the second half of the year, in an approximately equal mix of new and existing markets. We expect earnings per diluted share in the third quarter to range from $0.21 to $0.31 and earnings per diluted share in the fourth quarter from $0.39 to $0.44.

These earnings expectations, coupled with our actual results, are expected to result in full year earnings per diluted share of $1.00 to $1.15. I will now turn the call over to Jeff for his closing remarks.

As we look ahead, we continue to be confident in the strength of our store model, our value proposition and our opportunities for operating margin expansion. Further, we continue to believe that we can grow our store base in both new and existing markets to a footprint of approximately 400 stores. With the long-term investment we have made in our team and our systems, we expect to drive growth in the second half of the year to meet our strategic plans and revised financial targets for the full year.

While we believe that our customers will continue to be value-conscious at least near term, we anticipate further strengthening our operational execution as we move through the remainder of the year. Our new stores, including our locations in Canada, continue to outperform our plans. As these stores mature in the second half of the year, we expect greater expense leverage.

Further, we expect that our sourcing initiatives that Rob discussed, combined with those plans for the second half, will help us to build gross margin benefit as the year progresses with the most significant impact in the fourth quarter. As a result of these factors, we continue to believe that we will deliver stronger results in the back half of the year, particularly the fourth quarter, versus what we saw in the first half.

While we have faced both internal and broader macroeconomic challenges in the past 12 months, as we move forward, we are as committed as ever to the core components of our growth strategy, which has not changed. We anticipate further strengthening our performance through a consistent focus on greater pricing discipline and consistency, enhancement of our in-stocks and merchandising presentations, and leveraging processes that better support our Never Out of Stock strategy.

Growing attachment rates for moldings and accessories, increasing direct to store deliveries, including continuing to effectively execute our China supply chain initiative, and implementing key sourcing initiatives which will strengthen our value proposition and provide us with flexibility to pull different levers as we execute our growth strategy.

We are committed to being a low price leader in hardwood flooring. We will aggressively reinforce that in our marketing messages. We are confident that we can leverage the cost advantages from our sourcing initiatives to both promote low prices and improve gross margin. We remain confident that our commitment to serving customers, our unique store model, and further improvements to our operational execution will continue to drive market share gains in the fragmented wood flooring market.

Ultimately, we believe that the additional improvements that we have been making to our business will continue to contribute meaningfully to our results and put Lumber Liquidators in an even stronger position for growth going forward. We have the right foundation and the financial flexibility to execute effectively on the initiatives that we are undertaking. We will now turn the call over for your questions.

Thank you.

(Operator Instructions)

Our first question is coming from Budd Bugatch from Raymond James.

Good morning, Jeff. Good morning Rob, Dan, Ashleigh. This is actually TJ McConville filling in for Budd. Thanks for taking the questions.

Good morning.

Jeff, to your commentary toward the end of your prepared remarks in the first part of the call, sounds like starting to see the benefits from SAP. Now, I want to make sure we are hearing it correct. Is it flowing through to the top line? Are we starting to see some sales improvements here early on in the third quarter or is it more from an executional?

It's really more from an executional standpoint. We have a lot more visibility for inventory demand and movement. We can analyze much better individual sales by store, down to the SKU level. And that is going to help us make better decisions in product allocation and marketing. It's more of a long-term improvement, not something that we will see immediate improvement, but long-term we will be able to make better decisions.

Okay. That's helpful. And on the supply chain benefits in the gross margin and SG&A, I think it was 50 basis points and gross margin ten to 15 SG&A, is there any impact in there yet from these line reviews, Rob, or is that still to flow through as the inventory sort of turns through the system?

No, not in Q2 but it's coming down the road as I mentioned.

So, all the benefits we talked about was -- were from the increase in direct ship in the China consolidation.

TJ, this is Dan. There were benefits related to sourcing initiatives in the second quarter. They were more in the form of volume allowances, sample program participation, and specific promotions. The line review benefit will come into the third quarter and certainly into the fourth.

That was my next -- when can we expect that. Okay. That does it for me. Thanks for taking the questions. Best of luck in the back half.

Thank you.

Thank you. Next question is coming from Rick Nelson of Stephens Inc.

Good morning, this is Joe Edelstein filling in for Rick.

Sure.

Just curious to know whether or not you are able conduct one more than line review at a time.

We could but based on the way we are scheduling them, we are spacing them out. There's a lot of work goes into the preparation of the line review. We just want to make sure that we do a very thorough job on it, and that the vendors have the opportunity to be adequately prepared for it.

Okay.

Not something that we want to -- like Jeff said, there is planning and process and implementation that goes into it. We have laid out a calendar the next twelve to 18 months. We are implementing against that. The answer to the question is, yes, but our tactic is to approach it more over time.

Thank you. Can you share what the next product category is that is next up in the line review?

We prefer not to.

Okay. Second question, then, I know a couple of weeks ago on the announcement, you mentioned that the catalog and samples had still held up. I was wondering, has any of that turned into sales? Can you talk a little bit about trends so far in July relative to the guidance?

The only thing that I think we could say about July at this point is that it's more like June and March than April and May. So we feel more comfortable with trends in July.

Okay. Thanks. Maybe one final question. I was hoping you would maybe just walk me through some of the cost savings on the transportation side again. We have been hearing some of the price increases from some of the transportation companies. I'm just trying to get a better sense of -- are you working the 3PL that is giving you more options or how do you see the cost savings play out?

Part of the savings are on a comparable basis year-over-year. Last year at this time, the international container rates were rising pretty dramatically, and while this year's rates aren't much lower than the historic average, they are lower than last year. We capitalize those costs into our unit flows so we will recognize that over the inventory turn which will give us benefit beginning sometime in the third quarter, certainly into the fourth quarter.

We do expect to continue to benefit from direct programs, transportation costs, direct from the mill to the final sales floor is obviously the most efficient. We look to shift directly from a mill to a store, if not from the mill to the store through the China consolidation, which breaks bulk, repacks a container for direct store shipment.

Finally we bring product here, break it in Toano, and deliver to the stores, and look to the product allocation team to make sure that it's going to the final sales floor. We expect domestic fuel costs to be higher during the year which will partially offset some of the initiatives. We believe year-over-year transportation costs will be lower, and that the number of miles we drive per unit will be lower as well, so we will get a net benefit in the Q3, certainly in Q4, partially offset by higher domestic fuel costs.

Great. Thanks for your time.

Thank you. Your next question is from Matt McGinley of ISI Group.

Good morning. Dan, I have a question on the gross margin puts and takes that you gave us. You said the Big Sale dropped -- there was a 40 basis point head wind transport, or 60 basis point headwind, then sourcing and mix both gave you 50 basis points at benefit. What was the driver if the nets to zero, what was the driver that pushed it down 70 basis points

We didn't reconcile all the way through to the net 70. There was investment in quality control procedures that we called out primarily in South America that we are going to anniversary the beginning of that impact next quarter.

There is also some promotional pricing impact that isn't related to the Big Sale. So, we were more promotional -- there was more sales at promotional prices in the entire quarter, not necessarily just associated with the Big Sale. The piece we called out was the Big Sale component. There were also other promotional pricing and then there were other items that weren't material individually to call out.

Thanks. On the SG&A line, the other expense portion of SG&A continues continue to crease in dollar growth. In terms of what you saw in the second quarter, what caused the increase in the bank card discount fee rates? And do the SAP expenses in the third quarter of last year roll off, so that you would actually have a drop in the dollar growth of that other expense line?

We expect that -- that decrease. The bank card fees are up because we are using longer promotional periods related to our internal credit card, using more twelve month financing, even going up to 18 month financing, and that carries a different finance rate. Some of the fees that we incurred in the third and fourth quarter post implementation to stabilize the system will indeed fall away in the current year.

What percentage of your sales are on those bank cards?

We are still at about low side maybe 8% to 9%, and when we run a high side promotion, maybe 15% to 18%.

Thank you.

Thank you, next question from David MacGregor of Longbow Research.

Good morning, everyone.

Good morning.

You talked about large portion of sales at promotional prices. What is the normal percentage for the 2Q period in the past, and what was it in 2Q 2011?

We don't specifically break it out, but it was greater this year than it was in the past few years.

Is there any way you can qualitatively put orders of magnitude around that for us?

Only to the degree that the Big Sale has always pulled Q2's gross margin down on a comparable basis outside of any other factors, whether they are transportation or what not. The Big Sale represents a greater proportion of the second quarter sales than any other promotional event does of any other quarter. So the magnitude has been greater in the second quarter as this sale has grown and in this year, we didn't have the fill in before and after the sale so the sale itself represented a greater proportion of sales.

In addition to that, I think part of what we experience in the second quarter as we were coming out of the first quarter and the SAP implementation recovery and the demand metrics were starting to come back and we had really focused on, you know, aggressive sample distribution and follow-up with customers and the stores really got back to doing that very well. I think what happened is we were driving a lot of people into the store during promotional time periods. And as we saw some weakness in the business, we accelerated -- we expanded upon the number of items that we were putting out at promotional prices. I think we compounded the issue. We looked back and reflected on it and said we probably promoted -- put a lot more items out at promotional prices than we needed to. So we probably lost some margin dollars there.

As we are moving forward, we are going to continue to be very aggressive with our opening price points in our marketing, but that rather than put an entire category of products on sale, we will put selective items in the category on sale, and give the stores the opportunity to upsell. At the end of the day, the customers make their decisions based upon style and color. The price helps drive traffic into the store, and then we have qualified sales people who can upsell people. I think we lost sight of that a little bit in the second quarter. We feel confident that we can achieve both through the lower costs we are going to get from the margin initiatives, we can use those tools to keep -- make sure that the opening price points are very aggressive and have more narrow list of items actually being promoted.

Okay. Thanks for that color. I guess this is a follow-up question, back to the line reviews for a moment.

Your first line review, you are winding it up now, appears to have been very successful. It was on, what, maybe 20%, 25% of revenues? What would that have represented?

That was on our laminate merchandise category. You are right.

So the second phase, I appreciate you don't want to talk in a lot of detail where you are going with this, but can you give us a sense of phase two, what it would represent in terms of percentage of revenues? And would it also have a two quarter lag before it begins to have a meaningful positive impact on the P&L.

What I would tell you is that we have -- like I said earlier, we are scheduling to conduct a comprehensive line review of every category of the business over the next twelve months. We have those calendared out and our teams are working on them diligently now. So -- in terms of specific numbers, quarter-by-quarter, as we said in the past, this will come through overtime, it is more of a longer term process and initiative, and the way I would look at it, within each one as we conduct them, the degree of the savings and the timing of them will vary based upon the vendor base, the increase in base and timing and execution of the change.

David, I think that is important to think of any of them are probably at least two quarters. When you consider the time to place an order, whether it's a new product or replacement of an existing product, the manufacture of the product, the logistics and then working it through the average cost will take two quarters.

It will vary category by category as well. Some categories are more complicated than others in terms of the product mix and any transition of that product from one vendor to another.

Thanks very much. Last question, just quickly, is there any thing changing in terms of the cost of opening new stores?

No. Some of the stores were purchasing the forklift rather than leasing, that's a little granular. That is the only thing that we changed.

Thank you very much.

Thank you. The next question comes from Bradley Thomas of KeyBanc Capital Markets.

Thanks. Good morning. I wanted to follow up on sales over the last several months here, with three more weeks under our belts since the last update. Any new thinking in terms of what you are seeing from a competitive standpoint or cannibalization standpoint as you look back at what happened in April and May relative to June and now July?

I'll start out by just repeating what I said earlier that July looks more like June and March than April and May. So, we are encouraged by that.

From a competitive standpoint, I think that the trends that we have been talking about for the last few years aren't that much different. I think, you know, there has been a lot of attrition among the weaker independents. The independent that still around are a bit better than the ones that left the business. The big box retailers are spending more -- paying more attention to the category. I think that they changed their product mix to more low priced products which is the same trend that we have seen in the business the last few years.

But I will come back and say what I said before, we are absolutely committed to being the low price leader in the category. We have a lot of advantages. We can move quickly. We have a highly trained sales force that is very knowledgeable in the product. We have an aggressive marketing spend, that we have the flexibility to change our message, and tweak our message, and expand our reach if we want to.

We are going to leverage the margin benefits that we get from the sourcing initiatives to ensure that we continue to be the low price leader, and that we get the message out there. We are going to continue to focus on strengthening our position in the marketplace. Again, no significant changes from what we have seen from a competitive standpoint but maybe certainly a very strong focus on our part to strengthen our position.

It's clear that the line reviews and container rates coming down should be a nice tailwind for margins going forward. What is your desire in terms of pocketing those improvements from a profitability standpoint versus trying to reinvest them in pricing or in advertising? How do you weigh those different opportunities ahead of you?

The majority of the benefit is going to go into margin. But, there is enough there that we can certainly use some of it to ensure that we are the low price leader in opening price points.

Great. One last follow-up. I was hoping you could give us an update on year to date of your new stores. How many of those have been in newer markets versus existing markets, and what is the expectation for the back half of the year?

Of the 27 we have opened, it's almost split 14-13. Almost 50-50 there. Same expectation for the back half, roughly equal mix.

And remind me what that historic split has been if you went back the last couple of years?

If you went back about the past three years, believe it or not, it's fairly close to fifty-fifty.

Great. Thanks so much, guys.

Thank you.

Thank you. Our next question is coming from Peter Keith of Piper Jaffray.

Good morning everyone.

Good morning.

Question on the gross margin. I appreciate all the detail. You talked, I think last quarter and then about your business going forward, you should get a nice benefit from more disciplined retail pricing. I didn't see that called out in the queue or today in the conference call. Was that an impact for the quarter, and how do you think of that flowing through for the rest of the year?

I think I did mention it in my comments. It's something that we have continued to make progress on since we had kind of a relapse with it in the third quarter last year after the SAP introduction. But, you know, again, I think that the fact that we are going to be focused on strong opening price points means that there is probably less of a need for stores to do that.

This is Rob. I can answer that. With SAP and the increased reporting that we have, the focus and attention on it has increased and I would tell you confidently that it's something that we are controlling, and I wouldn't see it making a material impact at all for the balance of the year.

So, zero gross margin impact is what you are saying?

I would say if anything, there might be as we better manage it, there might be some potential pick up. At least that is our goal internally.

Okay. On a separate question, it looks like with the planned reduction in inventory per store you should have a healthy cash balance by the end of the year. So, you are sitting here now with a depressed stock price and building a cash balance by year end. Could you give us an updated perspective on potentially buying back some shares and implementing a repurchase program?

Peter, I would tell you we don't have a repurchase plan in place. It's something that we are discussing with our board but we don't have any more details to provide.

Thanks a lot, guys, good luck.

Thank you.

Thanks you. Our next question is coming from Matthew Fassler of Goldman Sachs.

Good morning, it's Ryan Brinkman for Matt Fassler. Could you please comment a bit further on the trend in inventory? It was mentioned that you continue to target $570,000 to $590,000 of available for sale inventory per store. How do you plan to walk down there from $631,000 currently?

Should we be thinking about any effect that might have for example on gross margins? Do you receive vendor volume rebates that could be impacted as you scale back on purchases et cetera?

Most of the excess inventory was a result of the sales miss. So, we will work through the inventory over the next few months. We fully anticipate to be at the targeted levels by the end of the year. We really don't expect it to have a negative impact on any volume purchases or vendor rebates on anything like that.

Again, keep in mind that inventory obsolescence risk is low here in this business category. We felt that and we still continue to feel that carrying extra inventory, particularly in moldings and accessories and some of the categories that we expanded, like engineered laminates, carrying some additional inventory is actually in the long run a competitive vantage.

Great. How do you view the difference in performance between your mature stores and the ones -- mature stores without a newer store in the market and then the ones that are being cannibalized somewhat? Has that changed a lot over time and is there any thought toward maybe focusing new store openings more toward newer markets than, for example, markets that already have a Lumber Liquidators presence?

The challenge that we have there is that the -- in our opinion, we are under stored in most of the major metropolitan areas. We are not completely servicing all the customers in those markets.

When we open a new store in an existing market, those stores tend to ramp faster, have better return on investment. Stores in newer markets tend to be a bit slower because they are smaller markets. We still feel like if given -- putting aside the sales shortfall, which none of us are happy about but something that we feel is not a long term trend for our business, we feel that we still have the opportunity to continue to open stores and gain market share. If it would not -- if the new store performance started to decline from what we are seeing today, we certainly would rethink that but we don't think we are near that today.

Okay, great. Thank you very much.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Management for closing comments.

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

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