LL Flooring Holdings Inc (LL) 2011 Q4 法說會逐字稿

Greetings and welcome to the Lumber Liquidators fourth quarter 2011 results conference call. (Operator Instructions).

It is now my pleasure to introduce your host Ashleigh McDermott, Director of Financial Reporting for Lumber Liquidators. Thank you, Ms. McDermott , you may

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

Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in Lumber Liquidators' filings with the SEC. The information contained in the call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time. Lastly, Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now I'm pleased to introduce Mr. Robert Lynch, President and CEO of Lumber Liquidators. Rob?

Good morning, everyone. I am pleased to be speaking with you today as the CEO of Lumber Liquidators. I have had the pleasure of being a part of this great organization for over a year now. And I believe Lumber Liquidators has never been better positioned for long-term profitable growth.

I began my retail career nearly 20 years ago with Walmart, and have spent the last 13 years in the broader home improvement industry. I understand the challenges and opportunities of growing a business and its brands through a strong value proposition and competitive differentiation. A guiding principal I learned early on is that a solid infrastructure consisting of management expertise, appropriate information systems, world class operational processes and consistent execution is required to sustain that growth. Lumber Liquidators attracted my interest because it is an industry leader with a uniquely profitably new store model. One of the best I have seen in my career. During 2011, I became more excited as I saw significant opportunity to align my skills and experiences with the potential for the Company's long-term growth in both net sales and operating margin expansion.

Today I am very passionate about the core Lumber Liquidators value proposition, and I am excited as I consider the opportunities we have in 2012 and beyond. The momentum we built in the second half of 2011 has the team focused on growth and committed to operational excellence in all that we do. The Company needed to invest significant capital in recent years to prepare for the next phase of our growth, and we are now positioned for a significant return on that investment. We expect to benefit even further going forward from the initiatives already implemented as well as those planned for 2012.

Turning now to our fourth quarter 2011 results. We steadily regained traction throughout the second half of the year. And while our bottom line results for the fourth quarter did not meet our expectations, we were pleased to end with our strongest year-over-year performance of 2011 in the fourth quarter. We grew net income 42.9%, net sales 13.9% ,gross margin 150 basis points, and operating margin 160 basis points to 7.7% in the fourth quarter.

We also drove positive traffic at our comparable stores in the fourth quarter for the first time since we implemented our new information system in August of 2010. We achieved that increase in traffic by both reinvesting a portion of our sourcing benefits in promotional pricing and clearing inventory that would better position us for 2012. Spending a portion of the gross margin gains from our sourcing initiatives allowed us to clear inventory that will not be part of our long-term assortment and set the stage for better regional assortments with lower costs for 2012. Due to the work by our sourcing, product allocation, and logistics teams we reduced year end available inventory per store by 15%. I am pleased with our financial position ending 2011 with cash of over $61 million, no debt, and an inventory position better aligned to optimize net sales in 2012.

Reiterating my earlier comments, we were pleased with the momentum we built in the second half of 2011 where total net sales increased 15.3% and comparable stores net sales increased 2.5% on the back half. In addition, we began to see a greater return on our investment and growth and infrastructure, as operating margin increased 170 basis points to 7.1% reaching a high for the year of 7.7% in the fourth quarter.

Before I turn the call over to Dan for a more detailed review of our fourth quarter and full year results, I would like to spend a few minutes taking a high level look at our business and discussing the opportunities I see for Lumber Liquidators in the future. Lumber Liquidators today is a very strong Company and has a value proposition that is relevant and resonates with the consumer. We have established a strong platform to grow this Company, and we have significant opportunities to expand. Lumber Liquidators is uniquely positioned to capitalize on the investments we have made, and to execute on our strategic initiatives to significantly consistently grow both net sales and earnings. As we move forward, we will take a prudent and balanced approach to growth and continuously improve our operations along the way.

We remain committed to our value proposition of price, selection, quality, availability, and people. And we will continue to invest in protecting and nurturing that value proposition for the long term. Looking at our strategy going forward, we are focused on five key strategic initiatives; growing revenue, continuing to improve our sourcing operations, optimizing our supply chain, driving traffic through advertising reach and frequency and developing the best people to serve our customers. Lumber Liquidator is a growth retailer. We will continue to open stores and expand our foot print in new and existing markets growing top line sales. This year we plan to open approximately 20 to 25 stores. A slower pace versus last year, but this will allow us to strategically utilize options to optimize total market returns with our enhanced site selection processes, our flexible store model and short-term leases, and an integrated real estate strategy that appropriately balances the mix of new stores, relocations, remodels and assortment expansion to maximize return on investment.

In our focus on sourcing, we will continue to execute the strategy we pursued over the last year; conducting line reviews and expanding our product assortments. We expect to further leverage our China office following our acquisition last year, and we will continue to work closely with our vendor partners to develop strong long-term relationships. Our supply chain initiative will be aimed toward shortening the distance between mills and the sales floor. Improvements we are making to our supply chain are directly related to our value proposition and specifically availability. Under the leadership of Carl Daniels our new head of supply chain we have an opportunity to make changes in our logistics that we believe will drive positive results over time. This will be a long-term multi-year focus for us, and we will apply the same rigor and discipline to our supply chain as we have to our sourcing operations.

Building on what worked in 2011, we are enhancing our focus on driving traffic through increased advertising reach and frequency. We are investing additional dollars in marketing in 2012 as well as redeploying some of our dollars to channels with a higher return on investment. Historically we have directed our market efforts towards the core DIY customer, and we see a substantial opportunity to expand our target audience to include other consumer segments. Finally, we will continue to make investment in the development of our world class sales team with particular focus on the associates in the stores. This is a critical piece of our value proposition and we are committed to developing and motivating our team.

One last thing I would like to comment on is the authorization of the $50 million share repurchase program we announced today. With our significant capital investments now behind us, we are positioned to maintain our strong balance sheet and generate substantial free cash flow. We are focused on returning value to shareholders and are pleased to have the ability to put a repurchase program in place. I would now like to turn the call over to Dan for a detailed review of our financial results and outlook, and then I will return to with closing remarks. Dan?

Thank you, Rob. Good morning, everyone. I am going to provide you some additional details on the results of our fourth quarter and full year 2011, and then discuss our outlook for 2012. I will start with our results for the fourth quarter. Overall our net sales were stronger than we expected , but our earnings per diluted share missed our target primarily due to decisions we made during the quarter which restrained gross margin expansion in the short term but we believe will provide benefit in 2012. As Rob discussed we cleared inventory that will not be a part of our long-term assortment. In addition we reduced the inventory level of certain products which would continue in our assortment, but where our sourcing initiatives either allow us to reduce certain basic stocking levels or the product will come from a new source in 2012 often at a lower cost.

Let me now take you through our net sales in the fourth quarter. Net sales totaled $174.5 million, an increase of $21.2 million or 13.9% over the fourth quarter of 2010 with net sales at non-comparable stores up $18.3 million and net sales at comparable stores up 1.9%. In the fourth quarter of 2010, net sales at comparable shores had been up 1.2%.

We believe the increase in comparable store net sales was driven by increases in both our average sale and the number of customer invoiced at comparable stores. Our average sale in the fourth quarter increased 100 basis points to $1,575 primarily due to an increase in the average retail price per unit sold as customers continued to prefer premium products across all merchandise categories. The number of customers invoiced at our comparable stores increased 90 basis points, as we drove demand through more effective advertising, promotional pricing, and the clearance of certain inventory. Net sales at non-comparable stores increased $18.3 million over the prior year period.

We opened seven new store locations in the fourth quarter for a total of 40 new locations for the full year in an equal mix of new and existing markets. Overall our 2011 new stores have generally met or exceeded our expectations. And at December 31st, we operated 263 stores including 7 in Canada.

Gross profit in the fourth quarter of 2011 increased 19% to $61.9 million and gross margin expanded 150 basis points to 35.5%. In comparison to the fourth quarter of 2010 gross margin generally benefited from lower net product costs associated with our sourcing initiatives and shifts in our sales mix, partially offset by higher transportation costs and clearance mark downs. As I said, though the expansion in gross margin was significant, it was approximately 90 to 120 basis points less than our original expectations due to an almost equal impact from reinvestment of the our sourcing benefits and promotional pricing to drive traffic, higher net transportation costs due primarily to our coordinated efforts to reduce available inventory, and the combination of clearance mark downs on non continuing products and mark downs to better position certain continuing products for new sourcing at lower costs.

Let me add some color to our transportation costs. We originally anticipated a gross margin benefit in comparing the fourth quarter of 2011 to 2010, due to lower international container costs, particularly in comparing the second half of 2011 to the same period in 2010. However our efforts to reduce available inventory resulted in a short term decrease in the percentage of direct shipments received by our stores, which was 20.1% of our unit receipts in the fourth quarter of 2011, down from 29% in the fourth quarter of 2010. As a result, a greater percentage of our units flowed through central warehousing, increasing the domestic miles driven delivering to stores. Further due to higher diesel fuel rates, the cost per mile was greater in the fourth quarter of 2011 than 2010. Increasing direct shipments received by our stores as a percentage of total unit flow remains a key goal in expanding 2012 gross margin. We believe the quality of our inventory position at year end will allow us to achieve this goal.

Selling, general, and administrative expenses were $48.4 million or 27.7% of net sales for the fourth quarter of 2011 compared to $42.7 million or 27.9% of net sales for the fourth quarter of 2010. This $5.7 million increase in SG&A expenses included approximately $4 million in increased compensation costs and approximately $1.6 million in increased occupancy costs and depreciation. The increase in compensation costs in the fourth quarter of 2011 was primarily due to store base growth, higher medical and other benefit costs, and certain one-time incremental commissions and bonuses at the store and regional levels to reward higher net sales.

Our advertising cost in the fourth quarter of the 2011 were equivalent to 2010 with leverage of our national advertising spend and increased efficiency of our direct sales generation programs. Our effective tax rate increased to 38.7% in the fourth quarter of 2011 compared to 38% in the fourth quarter of 2010 due primarily to an increase in foreign taxes. Net income for the fourth quarter of 2011 increased 42.9% to $8.5 million or $0.30 per diluted share based on approximately 28.4 million weighted average diluted shares outstanding. Our fourth quarter net income includes a net loss of approximately $0.01 per diluted share related to our Canada operations; approximately in line with our expectations and primarily due to advertising and administrative expenses.

I would now like to discuss our results for the full year. Net sales increased $61.3 million or 9.9% to $681.6 million. Net sales at non-comparable stores increased $73.8 million and net sales at comparable stores decreased 2%. Gross margin for 2011 was 35.3%, an increase of 50 basis points from 34.8% for 2010.

SG&A expenses in 2011 increased 14.1% to a $198.2 million or 29.1% of net sales from $173.7 million or 28% of net sales in 2010. The increase is primarily a result of our store base growth and continuing investment in supporting infrastructure, partially offset by national advertising leverage. The effective tax rate for 2011 was 39% up from 38.5% in 2010 primarily due to foreign taxes and certain non deductible expenses. Net income and diluted earnings per share were $26.3 million and $0.93 for both 2011 and 2010. The diluted share count was 28.4 million in 2011 and 28.2 million in 2010.

Turning now to our balance sheet and cash flow. Cash and cash equivalents increased to $61.7 million at the end of 2011 up from $34.8 million at the end of 2010, and up from $37.8 million at the end of the third quarter of 2011. The total inventory balance at the end of 2011 was a $164.1 million up from a $155.1 million at the end of 2010. However primarily due to the efforts discussed earlier, available inventory per store was $517,000 at December 31, 2011, down from $611,000 at the end of the prior year.

Capital expenditures totaled approximately $17 million for 2011 and $20.5 million for 2010. The decrease primarily related to fewer expenditures for our integrated information technology solution. In addition our strong balance sheet our available liquidity includes our revolving facility which we renewed this month and increased from $25 million to $50 million. However we did not draw on the revolving facility in 2010 or 2011, and we have no plans to do so in 2012. As Rob mentioned we are pleased to announce that our Board of Directors has authorized the repurchase of up to $50 million dollars of the Company's common stock. Though we intend to maintain a conservative balance sheet, we recognize that our proven store model will generate substantial free cash flow, and the most significant capital investments in our infrastructures and systems are behind us.

Turning now to our outlook for 2012, we currently expect net sales for the full year in the range of $ 710 million to $740 million which includes a comparable store net sales change in the low single digits either up or down, and as Rob discussed 20 to 25 new store locations including 2 to 4 locations in Canada. We expect 2012 earnings per diluted share in the range of a $1.05 to a $1.20 based on a diluted share count of approximately 28.7 million shares exclusive of any impact of a share repurchase program, and an effective tax rate in the range of 38.7% to 39%. This outlook assumes reinvestment of a greater portion of our 2012 national advertising leverage in incremental demand driving programs, resulting in our anticipated advertising expense as a percentage of net sales to be equivalent to 2011.

Capital expenditures in the range of $9 million to $12 million, and available inventory per store of approximately 540,000 to 560,000 subject to normal seasonal fluctuation. As Rob indicated we built momentum in the second half of 2011, which has continued thus far in 2012. That said, we have our important spring season ahead of us, and our outlook recognizes that demand for large ticket discretionary purchases in 2012 may be volatile and we expect our customer to remain cautious and price sensitive. I will now turn the call over back over to Rob for his closing

Thanks, Dan. As we look ahead, we remain confident in the strength of our unique value proposition, our profitable store model, and opportunities for growth in net sales and operating margin. Our financial position is solid and our operations are aligned to meet the needs of a value conscious consumer and take share in a fragmented market. We have a strong team in place with a focus on long-term growth to deliver value to our customers and shareholders, and before I turn the call over for your questions I would like to thank all of our associates in the US, Canada, and Shanghai for their dedication and ongoing efforts. Operator, we are now ready for questions.

Thank you. (Operator Instructions). Our first question is coming from the line of Peter Keith with Piper Jaffray. Please state your question.

Hi, good morning. It is actually John on for Peter. Just a quick question on your reduction in store growth for next year. Is 440 to 450 stores still your end goal for North America, and what was involved with the decision to cut back store growth for next year?

Good question. What I would say is our long-term goals for the potential of our new stores has not changed, and just to be crystal clear we feel we have significant opportunity to grow our store base over time in both new and existing markets. We operate in a highly fragmented industry, and we think we can continue to take market share in our industry. I think relative to short term slow down our goal here was more around some of my comments relative to our goals of continuously improving our operations and processes as a Company, building on some things we did this past year 2011. We have evolved site selection strategy, and we have learned some good things about how to go in and optimize the market when we are opening a new store, if there is an existing store that needs to be relocated. Our leases give us flexibility to do that. We are looking at incremental remodels and expansions of key assortments in categories to help mitigate some of that impact. So this gives us a chance to continue to build on those initiatives and optimize them in 2012.

Okay. Great. And then have you seen any projections on what the industry is thinking this year as far as hardwood and laminate growth , or maybe what you are thinking internally for

The industry numbers that we have seen indicate there is potential for low single digit growth across hardwood and laminate. Internally not much different. We look at 2012 as a really volatile year. We certainly have seen some improvement in metrics recently, but we know how fragile some of that recovery can be and the pressures on discretionary spend can return pretty quickly especially on large ticket discretionary. So our focus is on a market that is roughly flat to potential up very low single digits, and our focus is again gaining share.

Okay. Great , thanks a lot. Good luck this

Thanks, John.

Our next question is coming from the line of Rick Nelson with Stephens. Please state your question.

Good morning. This is Joe Edelstein filling in for Rick.

Hey Joe.

Just want to come back to a recent release we saw. There was another departure within the team. I am just wondering how the store operations are being handled today, and should we expect any further changes to the team?

What I would tell you is that the Company has made some good investment in the last few years in our information technology systems, in some of our leadership, in our new chief merchant and the teams underneath him, and our new head of supply chain and also in the field structure we have invested in our regional management staff last year, and we are really excited that that leaves us really poised to grow in the long-term. No other changes are anticipated. We are very confident in our field leadership. I have a background in operations. The opportunity that change gives us is the opportunity for me to be engaged in the field without distracting from my responsibilities here. And we see it as good thing. It is going to be a positive. We have a great team out there that is delivering on our value proposition every day, day in day out.

Okay. Great. Second question just on the new store plan obviously the number has come down there, but can you talk a little bit about the mix between existing markets and new markets you have planned this year?

Still believe it is going to be approximately equal opportunities in both new markets and existing. As we look at existing markets though, it is that exciting opportunity to look for total market optimization. The existing stores whether there is a relocation needed, remodeling, or even a change to the assortment plan so that we look for the best share of the market we can get. But it is approximately equal mix of new and existing.

Okay. And then with the opportunity in Canada I think you called out a $0.01 loss in the quarter related to that market. Do you think you can get to break even over the course of this year with the addition of the new stores?

We do. The additional stores and the continued climb of the sales ramp of the stores that are in Canada we expect that to turn positive late spring and then remain positive.

Okay, great. Then just one more question. Yesterday Home Depot had pointed strength in the flooring category. Can you just talk a little bit about the competitive environment that you are seeing from the big box stores and whether you think you are gaining share in certain categories losing share in others? Any commentary there would be appreciated.

Sure. This is Rob. I will tell you I mentioned the value proposition in my comments, and I want to reiterate that our value proposition, from my perspective you know I come from the big box society, I worked there. I have been in the industry for 13 years. The value proposition we have here is unique, it is powerful, it is intact and very relevant to the consumers that we have, our customer base. The customers are responding well to our value proposition, to the assortment changes that are being made by our merchandising team in price, in new products. They are responding well to our promotional events and our marketing plans which we see are invaluable to the business. And they are responding to our wonderful sales force out there, which is really a truly competitive advantage for us. We feel good. We feel that in the declining market over the last several years we have been gaining market share, and we still have that potential going forward including in 2012.

Great. Thanks for taking my questions.

Our next question is coming from the line of Brad Thomas with KeyBanc Capital Markets. Please state your question.

This is actually Jason standing in for Brad. I was wondering could you talk about how much of a benefit the Sequoia acquisition was to the fourth quarter, and then what you kind of see that run rate of savings as we move in 2012?

This is Rob. I will take that and then kick it to Dan for any detail. What I want to mention is the high level our sourcing initiatives benefits. In general I am very pleased and excited about what we are seeing there. And the teams are coordinating very well with merchandising teams with the stores on execution of those programs and they are meeting or exceeding our expectations. Long term we see a multi year cumulative benefit from these sourcing initiatives , and we are viewing as a currency or fuel that is going to help us drive that important value proposition in the market place and grow earnings along the

The only other thing I would add is I think the long-term benefit is being closer to the mills , improving the assortment, challenging the purchasing cycle. Certainly we took their mark up out as of the acquisition date that is working its way through the unit cost based on the inventory turn. It is going to give us quite a lift in 2012. But I think the real long-term benefit is that ability to be closer to the mill to challenge the purchase cycle, look at broad based assortment of lower cost products and that is what is ahead of us for 2012. So it certainly gave us some lift in 2011 but the real power is coming in

And have you or would you quantify what that lift is in terms of eliminating the mark up and maybe some faster lead times or anything like? Have you quantified any of that?

We have said that mark up was somewhere in low to single mid digits that is as far as we have gone with that.

Okay. And then you said part of it was clearing out some inventory to change your product assortment. Is that any significant changes in the mix or was this just older that you are replacing with new product? Or what was that clearing out and changes within your product assortment?

Some of margin benefit gave us the opportunity to clean up some unproductive inventory like Dan mentioned. And also as you think about the line review process and the changes a lot of the items are staying the same but sometimes we ship it to a different manufacturer. So there is sale through of the old inventory, replenishment of the new inventory at lower costs, and those are some of the things we took into consideration as we executed within the quarter. To make sure we are prepared for the long-term, the inventory is clean and productive, and we have the low cost products where we need to have it.

So would this be a slight drag going forward as you continue these line reviews and maybe have to turn over some more of this inventory in 2012?

I think that is going to be category by category, but I think relative to the sourcing initiative from last year I would say no.

Okay. Thank you very much.

Our next question is coming from the line of Matt McGinley with ISI. Please state your question.

Good morning. I had a question on the comments you made on advertising expense and payroll. Will the dollars for both of those things be up in 2012 or will they be flat and would you expect to leverage those into this year?

Advertising dollars will be up such that we anticipate the percentage of net sales to be roughly flat with 2011. So a stronger increase in advertising dollars than we have had in previous years. And the other question was payroll?

Yes, payroll.

Payroll expected dollars will be up. Potential flat to leverage them.

Flat to leverage. Okay. And then,Rob, I have guess kind of a philosophical question. How are you approaching the business differently now that you are CEO? And I guess what are you focused on this year in terms of your goals versus what you would hope to accomplish over the next 3 to 5 years? You laid out those 5 initiatives, but what are the real focus points for the near term versus the long-term?

I would tell you I am approaching it very much the same way. Last year Jeff and I worked very closely together, and we made some changes along the way and looked at some of the opportunities to leverage we had pull. So I think it is really continuing on the strategic initiatives we started on last year reaping those benefits. I would tell you one philosophy is this philosophy of continuing improvement in operations. My long-term objective is for the Company to grow. To achieve higher rates of growth over time in sales and also in operating margin expansion. Okay. That is our long-term goal. So we are doing the things now to make sure we can do that. We are looking at all the areas of the business. That is why we mentioned supply chain, that is why we talked about sourcing continuing. The overall philosophy we have is grow the business, drive continuing improvement along the way that will give us flexibility in that fuel that currency we talked about in every initiative we do to drive the value proposition for the long-term differentiation of this Company and sustainability of this Company and also to drive earnings appropriately as well to reward our shareholders. That is kind of our overall long-term view for the Company.

Great. I guess a real quick one I have on the repurchase authorization. How do you plan to deploy that cash to repurchases, and do you have a targeted balance of cash you would expect to have or need to have at any given time?

One of our philosophies is a fundamentally conservative balance sheet, so we are going to make sure we have available cash and we do have some internal targets. Otherwise we are going to go through open market purchases basically using the latter approach.

Okay. Thanks.

Thank you our next question is coming from the line of Matthew Fassler with Goldman Sachs. Please state your question.

Thanks a lot. Good morning. My first question relates to the decision to invest in price. Historically you had come to market with what seemed to be a solid value proposition. What led you to the decision that you needed to offer more? Is it something that you are seeing competitively, and how sustained do you think that effort will be?

Actually, Matt, it was not a short-term reaction to any issues we were seeing competitively it was more around the long-term value proposition which is as we looked out what happened the last few years competition has gotten a little better, and as we drove some of these sourcing initiatives it gave us flexibility to go back and look at our assortments. These line reviews and the work that Bill and the team are doing is not just about ringing out cost. It is about assessing the category, looking at each item, and seeing where we stand long-term on price. So we saw this as an opportunity to widen the advantage we have. We still had the advantage, we wanted to take the opportunity to widen that advantage, see how the customers responded, and make sure that the perception of that price proposition out there is relevant and strong. And that is what we are trying to grow when I talk about the value proposition long term.

To the extent that these were targeted efforts so far, how can you gauge or what have you seen in terms of the response in terms of gross profit dollars growth in categories where you have decided to address value?

We are pleased. I mean in general as I have said going back to the sources initiatives, I am pleased with the work the teams are doing, the achievement of the benefits and then the strategies within category, Matt, as we go through and we look at -- not to get to weedy -- but the opening price points versus the midpoint versus the higher quality goods. How are we laying out the assortment, how are we improving it so that back to the value prop. not just leading on price, but leading on selection. We want the best selection. We are going to ensure we have that. We want the innovative product that is out there. We are going to ensure we are doing those well. We are going to ensure that the customers know that we have the best price out there and that resonates with them. In general the results are positive in coordination across the line. We are certain it is working based on where we are taking targeting prices down or where we are taking promotions and bring in a line or something like that.

Understood. Just a couple of quick follow-ups. One is that you discussed the momentum if you will continuing. And if you could sort of give us some context for that . Are you talking about sales, are you talking about profit? Any color you can give us on that statement would be

Again I would reiterate what Dan said at the end of his remarks, which is we began building some good momentum in the back half of last year. Particular after the anniversary of the system implementation. That momentum has continued. We are pleased as you see the results in the third quarter and fourth quarter and the back half analysis in the comp differential half to half in the margin up significantly. On the inventory position we have shown the ability there to operate, the stores are really delivering on the challenges we are given them. And we are excited. So we see it continuing. However we are early in the year and our important spring selling season is ahead of us. We know we are much more discretionary than some of our competitors that you were talking about based on their assortments. Consumers are going to I think remain cautious and price sensitive, but the good news is our value proposition is intact and relevant and the things we are doing are working.

And just a last follow-up . If you think about your short fall in the quarter versus your guidance. It sounds like there was three primary drivers across gross margin one of them was effectively arguable to look through as you talk about clearing inventory, one related to energy prices I guess and the third -- associated with logistic costs, and the third was a strategic decision that sounds like will continue. If you were to quantify those three could you put them in context for us such that for example if you telling us how much clearance activity cost you, and how much the energy and logistics issues might have cost

Matt, we divide those almost equally. We missed by about 90 to 120 basis point, so if you assign 30 to 40 to each one. We believe 60 to 80 will not continue into 2012, but that we will continue to reinvest a portion of our sourcing initiatives through 2012. So just look at those three items as equal. And we think we finished repositioning the inventory, we cleared the product that needed to be cleared, we are in a very healthy good shape looking forward in inventory, so we don't see that as an issue going into 2012. The other 30 to 40 basis points yes.

Got it. Thank you.

Our next question is coming from the line of Budd Bugatch with Raymond James. Please state your question.

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

Good morning.

First question I had to piggy back on Matt's previous one as to the investment in price wanting to widen the advantage. Now, if we look at the categories from your perspective , Rob or Dan , is there any category now that you think you have a wider competitive advantage in than any of the others. In that if we get any sort of mix shift back to normal, things improve, how does that flow through your gross margin in your opinion or your pricing advantage however you want to

I don't think I would want to talk specifically about anyone of those categories for competitive reason, but what I would say is and I think know where you are going with the question. We are excited again I want to reiterate the sourcing initiatives are driving the benefits we expect. We are happy about that. As we implemented on each category line we are going through and making sure that again looking back at the core values propositions the Company was founded on clear price advantage is part of that value proposition. It is one of the five keys to it. So we are going to make sure as we do a line review, as go through item by item, category by category that we have a clear advantage there. So that the consumer -- the way I would put it is in the consumer mind when they walk in our stores or they walk into a competitors store and get a sample when they come in it should be clear that they are not going to get a better price anywhere and that's what we are working towards long-term. And what I would say is as we are engaged, we have our pulse on what is going out there as mix shifts, as demand shift, as competitors react and do things we will be there as well either way.

And, TJ, I would just add it is a little different than looking at it species by species, but we have always believed we have got the largest advantage in the premium product. Less so at the entry level or commodity level products, and we think that has been extenuated by the line review. So in a category if we can get comparable product matches we think our advantage is higher at the premium product level.

That is very helpful, Dan. Have you seen -- we have the mix numbers for the year any sort of consumer behavior changes toward the end of maybe this quarter or into next? I know it is kind of tough to see through the clearance activity , but is there any indication that demand is moving in that direction at

Not back toward some of the higher average retail price points yet. We are seeing still a migration toward the premium products, but we are not seeing that flow back into some of the solid hardwood or some of the much higher average retail price point products.

Okay. Second question I have is to the revised target here for available for sale inventory. Can you provide any color in how you arrived at the new level, and what type of thinking went into that , and where the upside or downside risk of that

Let me start with that, and then I will turn it back over to Rob. One of the great changes that took place was to bring in a robust merchant team in 2011, new head merchant group that is doing great product allocation. The system provides the detail to start looking at regional assortment, basic stocking levels. The line reviews allow us to challenge the purchase cycle as we are closer to the vendor and what the replenishment points need to be. So I would tell you as a more sophisticated and detailed review has been done we have been able to lower our target from 570 to 590 per store down to 540 to 560 per store without any adverse impact on sales.

Okay. Guys that is very helpful . Thanks for taking the questions again, and best of luck in

Okay. Thanks.

Our next question is coming from the line Laura Champine with Collins Stewart. Please state your question.

Good morning. My questions is about unit growth. I appreciate that you are saying the opportunity is the same as it was before you decided to scale back unit growth in 2012, but should the growth rate ramp back up or is the 20 to 25 stores a year is that a level where you are comfortable longer term?

Laura, this is Rob. Again what I would say is I would reiterate the fact that long-term potential has not changed in our mind . We feel that we have significant opportunity to grow relative to the amount of share we have in the industry. If you consider how flexible our model is, the lead times that we have relative to site selection to getting a store open. Think about the capital requirements for our stores how low they are. Around a $100,000 per store in non inventory CapEx, 225 in inventory, and how profitably the store model is. It returns cash very quickly. It is profitable within months. So that is exciting. The full term potential is exciting. The numbers we gave in terms of unit growth were only for 2012, and these we feel are reasonable given the environment we have been in and where we see the consumer right now. And it allows us I think the most important thing I would take away from it is not the long-term opportunity where we think we can go long-term. I think it is really about continuance improvement and optimizing the business along the way.

And we learned and we are building on some things from last year as we went into some markets in the back half of year. I talked about this integrated approach to our real estate strategy, and that is what I want you to take away. Is we want to make sure when we go in, when we spend the money, when we make the investment that we are optimizing for the long-term shareholder. And that is going to include a slightly different look and a tweaking on how we look at the new stores new and existing. How we look at the existing stores on those markets relative to their leases. Our short term leases give us great flexibility to relocate, to remodel. And again we are taking an integrated combined approach to the market to make sure we are optimizing when we go in for the long-term that is

Secondly, I wanted to ask about the forecasting when it came to margins, because the guidance was given on October 27, and you beat the sales but missed the margins. Did something change in traffic trends that made you become more promotional, or did something change in your sourcing that made you feel like you needed to clear more inventory than you thought at the end of October?.

What I would say is nothing changed. This was an intentional decision for us to go in and it was more of a looking towards 2012 and beyond. We saw the opportunity that the line reviews we were implementing, we wanted to make sure we had the right inventory at the place going in to 2012, so we made some decisions to clean up some inventory to get clean for the future. That is what it was. It was some short decisions for the long-term health of the inventory. The long-term ability for us to grow sales and margin in 2012 and beyond.

I guess the question is rooted in the issue of visibility. How much visibility because it hasn't seemed that you have had much visibility even a couple of months out into your gross margin levels. Is that something that is improving or is that just part of the story?

I would say it is improving , Laura. We did have some visibility it was disappointing to miss the number. A couple of those decisions we made during the quarter to go ahead and reposition inventory and set ourselves in a better place heading into 2012. Part of the reason we were able to make that call and do it during the quarter was because we had visibility into its performance and where it was. We believe we are a year past SAP now as we look into 2012, we have got a better handle on our information, and we feel like we can take a better look at our business going

Great. Thank you.

Thank you. Our next question is coming from the line of David Strasser with Janney Capital Markets. Please state your question.

Thank you very much. I have a quick question first a clarification. In the K you didn't give the actual cannibalization for the quarter, or at least if you did I missed it for the fourth quarter. I kind of tried to back into it for the year. I was trying to get a since it looked like it had improved from Q3, but I was just trying to see if you had a number?

David, we have an annual new table in the K that you saw that shows that. For the quarter it was about 490 points.

So it definitely improved from Q3.

Yes, Q3 was I think 525 or 530 something like that.

Okay. As you kind of look, one of the things we were trying to do using that table and trying to understand how you define an existing market or cannibalized versus non cannibalized market, because I guess you said you will open half and half next year and I think you may have said it was half and half this year as well. So I am just trying to understand how you look at that and how you come? Is it a distance issue ,what do you do to define it?

It can be distance, drive time, current market penetration. There are several factors that will determine whether we are in an existing market or not. It is not just one it is multiple as you might expect.

Has that definition changed overtime, or is it constantly being around the edges or something?

We certainly continue to improve our real estate process. We brought in a new individual a couple of years ago who brought far more sophisticated techniques. So to the degree there has been some changing in the definition around, sure.

Hi, David. This is Rob. I would like to chime in on that too. Back to the real estate processes on site selection and cannibalization. Our team there as we improved on those processes as we are in committee one of the things we have the ability to do is our existing stores we have all their sales by zip code, by address, and we can see and project where the existing sales are coming from and it gives us a really good indicator of what is going to happen when we come in with a new store. And that is some of the tools we are using, some of the analytics we are improving on in the process that is helping us.

As you look at it, what do you think is the mix today between cannibalized and non cannibalized markets?

Of the whole 263 stores?

I'm not asking for a definitive number just trying to get some symbolist of what that mix is.

David, I might have to get that for you. I don't have that off the top of my head.

I can follow-up with you that's fine. I guess one last question and I should have asked at the beginning for clarification. The two and three year comp how do those track in the fourth quarter?

I think they were fairly strong in the fourth quarter.

Okay.

I think over 20% in year one, and high single digits in year two.

Okay. So they seem to be getting back towards that sort of (Inaudible).

We are moving away from the implementation. Obviously we had a lot of productivity issues when the new system went in. And you are never sure when you are out of it until you have hindsight and we just built a lot of momentum in Q3 and Q4 , and we are feeling it into 2012 . We are confident and cautious looking ahead that the discretionary spend is going to remain under pressure, but there has been momentum build the farther we get away from

Well, thank you. And good luck Rob.

Thanks.

Our next question is coming from the line of David MacGregor with Longbow Research. Please state your question.

Yes , good morning,

Good morning.

Just back on Laura's question on the site selection strategy . Can you just specifically talk about to the extent that you are kind of raising the bar on your stores. How should we think about the impact on the capital cost of store growth and also on your periodically occupancy

I would tell you that obviously under our philosophy of continuance improvement we are looking at everything. Good question, because we are challenging the amount of capital going in. We are challenging the occupancy costs, the rents, and again we are trying to continuously improve what we are doing here. So one of our core objectives is as we go forward here one of the things we have been driving on last year and seem to be working is why the new stores are performing so well. Is we are looking to keep occupancy costs the same or lower but try to improve the quality of the location of the site. That is one specific thing we are doing, but we are looking at CapEx, we are looking the terms of the leases, we are looking at the acceleration in there. All the detail drivers of the strategy.

David, I would just add in there may be a slight increase overall in an existing market when you look at CapEx if we not only open a store but do a major remodel or consider a relocation but nothing material. It may go from a 100,000 to 125,000 over all still very low number. Same with the occupancy we are not anticipating much of a change there in either or base or our triple net base.

Okay, good. Rob, just as the new CEO can you offer your assessment why since 2009 Lumber Liquidators has grown the top line by about 25% but there has been no increase of net income at all. And I guess part of it is the Company been going through kind of a transformational process with the SAP and systems and management and every else, but can you help me understand sort of distinguish between the cost of transformation versus the cost of management decisions and market factors.

I think you hit on it the way I would look at it is I have been fortunate to work at companies like Walmart like Home Depot. I was there and saw them double in size in the time I was there. And in the fast growth retailers there are phases in the growth that you have to invest for the long-term. Your infrastructures your systems your teams are not going to get you down that next leg of the growth. I would look at it as definitely the investments that had to be made to set this Company up and set the platform for future growth and sustainability of the Company that is what is was. I mean information technology systems, people investments you name it those had to be done. They were done the last couple of years and the great news is they are behind us and it is time to leverage them.

How much time elapses before you run into another point like this is it 5 years down the road or 3 years down the road, or the investments you are making today buy you how much growth?

I would say we have a nice window ahead of us here because of the systems we are putting in. They are rock solid. They are working just fine, and they allow us to grow for a very long time here.

Okay. I have some other questions, but I will follow-up with you off line later today. Thanks.

Our next question is coming from the David Magee with SunTrust Robinson Humphrey. Please state your question.

Hi, this is Chris Rapalje on the call for David. Just a couple of questions. First in your comments about advertising you mentioned that you wanted to try to reach a customers outside of your untraditional do it yourself. I was wondering who you are trying to reach there? What we should expect as far as new venues, et cetera?

What I would tell you first of all is this goes under our message of our opportunity to grow the Company. We are in a fragmented market, we have limited market share, we think we can grow new stores over time and we can actually also grow and bring us some additional customers, which we have actually been seeing in terms of building on what happened last year. As we have tweaked the strategy somewhat as we have tweaked the marketing and advertising, so we are excited about that. The key message is our core consumer that core strong DIY is our bread and butter and we are going to remain focused on that consumer and loyal to that consumer, but we are really just trying to expand our radar and under the umbrella of continuous improvement how can we leverage the margin enhancement opportunities to let us stay on offense and advertising and go test the waters in some of these other segments to kind of widen that radar and our market. Okay. That is kind of what we are trying to do, and then within the advertising program within themselves we are looking at where are we, where is there a diminishing return on the incremental spend and how can we redeploy those dollars again towards some of these new opportunities. So it is a kind of broad look and we are defining some of those as we go and we are learning from some of the things that happened last year. I would just say stay tuned for that, but the opportunity is significant.

Okay. And then secondly, do you see any risk to your pricing negotiating power with vendors if there is indication that the housing and flooring market look better this year?

No. Although I would love to think that is going to take place.

No. Not at all. I think with the teams in place, the processes, the structure regardless of that we have got the opportunities before us for like I said the accumulative multi year benefit and sourcing and margin opportunity.

Okay. Thank you.

I would like to thank everybody for joining us on today's call. We look forward to speaking with you again on our next quarterly earnings call to provide an update on our continued progress and executing our strategy and achieving our long-term objectives. Thank you.

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