LL Flooring Holdings Inc (LL) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Lumber Liquidators first quarter earnings call. With us today from Lumber Liquidators is Mr. Rob Lynch, President and CEO, and Mr. Dan Terrell, CFO. As a reminder this conference is being recorded and may not be reproduced by whole or in part without permission from the company. I would now like to introduce Ms. Ashleigh McDermott. Please go ahead.

Thank you. Good morning everyone and thank you for joining us today. Before we begin, let me take a moment to reference the Safe Harbor provisions of the United States Security 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 their expectations reflected in its forward-looking statements are reasonable, they can give no assurance that such expectations or any of those 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 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 under takes no obligation to update any information discussed in this call. Now, I'm pleased to introduce Mr. Rob Lynch,President and CEO for Lumber Liquidators. Rob, please go ahead.

Good morning, everyone. I'm here with Dan Terrell, our CFO, and we are excited to be speaking with you about our first quarter results and solid start to 2012. Overall we are very pleased to see our value proposition combining price, selection, quality, availability and people, continuing to resonate with consumers. Our team remains focused on revenue growth capitalizing on increased traffic in our stores, and building on our momentum from the second half of 2011. Specifically we believe our targeted marketing programs, supported by our sourcing initiatives, helped generate strong customer traffic. Effective execution by our store teams increased conversion into net sales. Additionally, we continued to implement our sourcing and logistics initiatives enabling us to expand operating margin. Our entire team is focused on driving growth and striving for operational excellence in all that we do.

To discuss our highlights of the first quarter. Net sales increased almost 18% compared to the first quarter of 2011. Comparable store net sales were up 7.5%. Goss margin climbed 110 basis points to 37.3%. Operating margin expanded by 120 basis points and net income increased approximately 42%. Also in the first quarter we completed our inventory optimization, launched our share repurchase program, and continued to reinvest a portion of the gross margin gains from our sourcing initiatives to enhance our competitive position as the low price leader.

On last quarter's conference call we outlined the five key strategic initiatives that we are focused on this year. Growing revenue, continuing to improve our sourcing, optimizing our supply chain, driving traffic through advertising reach and frequency, and developing the best people to serve our customers. I would like to update you on the progress we have made in these areas.

We attribute the growth in our customer traffic to the strength in our marketing and advertising programs during the quarter. As many of you know, historically, we have directed our marketing efforts toward the core DIY customer. Beginning in the fourth quarter, we tested broadening our advertising reach and frequency to expand our target audience to include other consumer segments.

Based on positive response from fourth quarter tests, we fully implemented this strategy as the important spring remodeling season began in the first quarter. We were pleased that even with our enhanced marketing strategy, we were able to leverage our advertising spend given our strong top line results. Additionally, we further expanded our footprint opening four stores in the first quarter. We are tracking according to our store opening plans for the year as we have placed greater emphasis on optimizing total market returns through an integrated real estate strategy. We have enhanced our site selection processes and will continue to appropriately balance our mix of new stores, relocations, remodels and assortment expansion to maximum return on investment. We reiterate our plan is to open 20 to 25 new stores in 2012.

In terms of sourcing. we are executing the strategy we have employed in our recent quarters; performing line reviews and expanding our product assortments. We will continuously foster our vendor relationships and work closely with our vendor partners around the world to further enhance our sourcing strategies. I am impressed with the team's performance in this area,the benefits of which are reflected in our gross margin and operating income.

As we discussed last quarter, optimizing our supply chain, just like our sourcing initiatives, will be a multi-year initiative. That said, we are already making progress on a number of fronts. Similar to the benefits of our sourcing initiatives a portion of these benefits will be reinvested in support of our value proposition and in expanding operating margin.

Most importantly, we continue to emphasize the ongoing development of the Lumber Liquidators team, both at the senior management level and within their departments. Our world class team believes in, and is committed to, a shared strategic plan and set of initiatives. I'm thrilled that our entire team is aligned around our goals and is working so well together to drive results.

I'd like to specially recognize our field organization and their efforts in successfully implementing our strategic initiatives and in driving continuous improvement in our store-level operations. In addition to consistent execution, and our focus on operational excellence, we have established a fun working environment and culture and are serving our customers better than ever.

As I mentioned earlier, we initiated our share repurchase program during the quarter. We purchased almost $9 million worth of shares. We remain focused on returning value to shareholders and are pleased to have been able to launch this program. We believe we are very well positioned to leverage our past capital investments, maintain our strong debt free balance sheet, and generate substantial free cash flow.

Lumber Liquidators continues to be a very strong company with a value proposition that is relevant and resonates with consumers. We have established a strong platform to grow and we have significant opportunity to expand. We believe we are in a position to capitalize on the investments we have made in recent years and to execute on our strategic initiatives to consistently grow both net sales and earnings. I'd now like to turn the call over to Dan for a detailed review of our financial results and outlook and then I'll return for closing remarks. Dan?

Thank you Rob. Good morning, everyone. I will provide additional details on our results for the first quarter and then update our outlook for the remainder of 2012. Net sales for the first quarter of 2012 grew to $188 million, an increase of $28.4 million, or 17.8% over the first quarter of 2011 with both comparable and non-comparable stores contributing to the increase.

At comparable stores, net sales increased $11.9 million or 7.5% which we believe resulted from an 8.0% increase in the number of customers invoiced partially offset by slight decrease in our average sale. As Rob indicated we continue to better coordinate our sourcing initiatives with our promotional campaigns and we believe our efforts to expand our advertising reach and frequency resulted in greater recognition of our value proposition and increased traffic to our stores.

With regard to our average sale, customers continue to prefer premium products in product lines with lower than average retail price points. As a result, our average retail price per unit sold decreased 1.8% partially offset by an increase in our volume per sale.

New store locations continue to drive our top line and net sales of non-comparable stores increased $16.4 million in comparing the first quarter of 2012 to 2011. This net sales increase comes from the 44 new locations opened since the beginning of 2011, including four in the first quarter of 2012 and 16 in the first quarter of 2011. As a reminder, we generally consider a store comparable on the first day of the 13th month of operation. As a group, our non-comparable stores are more mature on a month of operation basis in the first quarter of 2012 than they were in the first quarter of 2011. This is due to our varying the number of stores opened each quarter over the last two years, including in 2011 when we opened 27 of our 40 new locations in the first half of the year. As a result, our non-comparable stores averaged approximately eight months of operation in 2012 versus approximately five months of operation during the first quarter of 2011. The net sales at a given store generally increase with maturity, particularly in the first two years of operation.

Gross profit increased 21.4% to $70.1 million and gross margin was 37.3%, up 110 basis points in comparison to the first quarter of 2011 with benefits from both transportation and product cost. We believe that net shifts in our sales mix and the net benefit of sourcing initiatives contributed approximately 45 basis points to the gross market expansion in the first quarter of 2012.

Within our sales mix, moldings and accessories were 15% of net sales in the first quarter of 2012 from 13.8% in the first quarter of 2011. And as many of you know, moldings and accessories have a higher than average gross margin. Within our sourcing initiatives, gross margin in the first quarter 2012 benefited relative to 2011 due to the continuing impact of line reviews and an increase in direct sourcing from certain international vendors which were serviced by Sequoia prior to our acquisition in the third quarter of last year, partially offset by lower vendor allowances. Our sourcing initiatives were launched in the first quarter of 2011 and at that time, consisted primarily of vendor allowances, including significant initial support from Sequoia.

We believe lower net transportation costs contributed approximately 65 basis points to the gross margin expansion in the first quarter of 2012 due primarily to lower international container rates, and better alignment of product allocation to sales demand. These net benefits were partially offset by a higher average cost per domestic mile driven due to higher fuel costs, and a decrease in direct shipments received by our stores.

As new store inventory levels were realigned in the first quarter of 2012, unit purchases received directly at the store decreased to 17.4% down from 21.9% in the first quarter of 2011. Increasing the percentage of direct shipments received by our stores continues to be a strategic initiative and we believe we will have a greater percentage for the full year 2012 than the approximately 23% achieved in 2011.

Selling, general and administrative expenses were $56.8 million for the first quarter of 2012 compared to $48.5 million for 2011 but as a percentage of net sales were 30.2% in the first quarter of 2012 versus 30.3% in the first quarter of 2011.

Overall, SG&A reflects the growth in our store base including Canada, higher commissions earned by our store management in the first quarter of 2012 than in 2011, higher accruals for annual management bonuses, higher benefit costs including medical expenses and certain higher legal and professional fees including those related to our California class action matter, launch of our share repurchase program, and renewal of our revolving credit facility. Further, we increased our advertising spend by a net $1 million in comparing the first quarter 2012 to 2011, but leveraged that spend 70 basis points across a larger store base with a stronger net sales at comparable stores. We continue to reallocate our advertising to more effective media channels as we broaden our reach and frequency.

The effective tax rate was 38.6% in the first quarter of 2012 compared to 38.7% in the first quarter of 2011. Net income for the first quarter of 2012 increased or 41.9%, to $8.2 million, or $0.29 cent per diluted share based on approximately 28.5 million weighted average diluted shares outstanding. Net income for the first quarter of 2011 was $5.8 million or $0.20 cents per diluted share based on approximately 28.4 million weighted average diluted shares outstanding.

Our first quarter net income this year includes a net loss of approximately $0.02 per diluted share related to our Canadian operations. Approximately in line with our expectations and primarily due to advertising and administration expenses. We expect our Canadian operations to be neutral to accretive to net income beginning in the second quarter of 2012.

As Rob mentioned, we began our share repurchase program in the first quarter and through March 31, 2012, we have repurchased approximately for 387,000 shares of our common stock for $8.9 million and we have approximately $41.1 million remaining under our authorization. Cash and cash equivalents totaled $61.4 million at the end of March, compared to $61.7 million at December 31, 2011, and up of over 42% from the $43.1 million at March 31, 2011.

The total inventory balance at March 31, 2012 was $191.8 million up from $164.1 million at December 31, 2011, and $163 million at March 31, 2011. Our available inventory per store was $578,000 at March 31, 2012 up from $517,000 from December 31, 2011, but down from $596,000 at March 31, 2011. Available inventory per store at March 31, 2012 was lower than the prior year as we continued to better align inventory levels with sales demand through strengthened merchandising, product allocation, and distribution initiatives. Inbound in transit inventory of $37.4 million at March 31, 2012 was significantly higher than the $20.7 million at March 31, 2011 due primarily to the timing of certain international shipments, better alignment of inventory with the timing of certain promotions, and our plan to generally build inventory earlier in 2012 than 2011 to meet the spring demand.

We continue to target available inventory per store to range from $540,000 to $560,000 with variations based on seasonal demand and product availability. We anticipate inbound and transit inventory to approximate historical levels by the end of the second quarter 2012.

Working capital was $168.1 million at March 31, 2012 compared to $151.7 at March 31, 2011 with the current ratio at 2.7 times and 3.3 times respectively. Capital expenditures totaled approximately $3.2 million for the first quarter of 2012, compared to $4.2 million for the first quarter of 2011 with the decrease primarily due to fewer new store openings and lower expenditures for our integrated information technology solution.

Turning now to our updated outlook for 2012, we now expect net sales for the full year in the range of $720 million to $750 million up from our previous range of $710 million to $740 million. The change in comparable store net sales to range from slightly negative to low single digit positive. We continue to anticipate opening 20 to 25 new store locations in 2012 and we now expect 2012 earnings per diluted share in the range of $1.10 to $1.25, based in the diluted share count of approximately 28.4 million shares exclusive of any future impact from our share repurchase program, up from our previous range of $1.05 to $1.20.

The first quarter of 2012 continued the momentum we built in the second half of 2011. That said, we are in the middle of our important spring season and our outlook recognizes that the demand for large ticket discretionary purchases in 2012 may be volatile and we expect the consumer to remain cautious and price sensitive. As we move forward, we are committed to executing our plan of continuous improvement and expect to deliver multi-year operating margin improvement. I'll now turn call back over to Rob for his closing remarks.

Thanks Dan, our team continues to be motivated and excited by the opportunities ahead and we are pleased with their coordinated efforts in providing the industry's best value proposition to our customers. We entered the important spring remodeling season well positioned to serve customer demand and continue to capture share in our fragmented market. Our key strategic initiatives and infrastructure investments have generated returns over the last three quarters which we believe will continue and be cumulative in the coming years.

We remain confident in our store model, value proposition, and expansion opportunities. As we move forward we are committed to taking a prudent and balanced approach to growth, and continuously improving our operations. Maintaining and enhancing our value proposition of price, selection, quality, availability and people remains our priority and we will continue to invest in protecting and nurturing our value proposition for the long-term. Before we turn the call over for 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.

Ladies and gentlemen we will now be conducting a Question and Answer session. If you would like to ask (Operator Instructions). Our first question coming from the line of Brad Thomas with KeyBanc Capital Markets. Please state your question.

Thanks. Good morning Rob, Dan and Ashleigh and congratulations on the great quarter here.

Thank you.

Just focus on comps and the guidance. This is your best comp in over two years, really a great job of executing here. You have another relatively easy comparison in the second quarter, the housing market seems to be getting better, you have less cannibalization, your marketing seems to be working. Could you just help us think about your guidance for comps and what the puts and takes are and why perhaps things couldn't be a little bit better than that range that you've given us?

This is Rob. What I do want to say first of all is that we feel really good about the momentum we've been building. Since Q3 last year, Q4 and Q1, we've had three quarters of consecutive build in sales, gross margin and operating income. I would say the guidance in our comps reflects more of the fact as Dan mentioned, we're not totally through our important spring selling season, we've got several weeks ahead of us there. It's critical, we're focused on that, so we have still have a bit of a cautious out-look. Particularly, as Dan mentioned, we operate in the big-ticket discretionary area of home improvement, so we still expect that customers will be cautious given these discretionary purchases and so we think our guidance is appropriate on the comps. It's appropriately conservative.

Okay great. And then to follow up on new store productivity by our calculations it came in over 80%. I would love to hear based on your analysis how it came in for the quarter, I would think that you would get better productivity as you take look at closer look at where you want the stores and have a higher threshold. To that extent could share some color on that it would be very helpful.

Brad, I'll start, and then maybe Rob can add in on some of experience we've had on improving the site selection and the market optimization but from a productivity standpoint in the non-comp base, I think one of the drivers is the maturity of the stores. We're averaging eight months of operation in Q1 versus five months last year. As our stores climb up the sales ramp that tends to contribute more to the non-comp number and increase new store productivity. We'll expect that number to come down in the second quarter and eventually stabilize at the more historic levels. We still continue to look for the mid 50 range on new store productivity. But as you say, certainly our approach to new stores, the real estate team we've got in place, the commitment to continuous improvement and market optimization has had an impact.

This is Rob. I would add to that too that if you net out the difference in the comps based on maturity of the store ages, I think the key thing to think about is, we keep talking about continuous improvement. We've dialed in. Part of the reason why we've slowed down in our new store growth was to dial in, open the hood, and really look at our real estate strategy. To dig in, make sure it's integrated, make sure we're driving total market returns. We've been tweaking it behind the scenes last year, and this year.

We're very pleased with things we've done in the site selection process. Some of the other things we're doing as we balance the mix that we talk about again, new stores, remodels, relos, assortment expansions. So over all I would say that we're pleased with the new store performance in that model, and again when you combine that with our opportunity for growth and market share, we're excited about the future.

Very helpful. Thanks so much.

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

Good morning. You stated your strategy for the year was to drive traffic and improve margin rates. In terms of what we saw in the quarter with really strong gross margin leverage and modest SG&A leverage, is that kind of the play book that we should expect for the rest of the year with pretty strong gross margin gains and smaller SG&A increases?

Yes. We've talked a lot about our sourcing initiatives, and the thing there as well as we've divided all the parts of the business within supply chain, within store operations, it's a long-term view of continuous improvements and driving those benefits. Overall we're pleased with the results from the our sourcing initiatives, they're flowing through as expected, and we expect them to continue over time this year and beyond for several years.

When we last spoke to us during fourth quarter I believe you said that payroll would likely grow at around the rate of sales. Given you had a pretty good increase in your sales rates, your payroll didn't leverage as much as we would have expected driven by the commissions and bonus accruals on that higher sales level. If you had better sales throughout the duration of the rest of the year would you actually deliver payroll through 2012?

To the rest of 2012 on a higher sales number we think the first quarter would represent the highest percentage of sales and you're right it was driven by increased commissions, bonuses, but there were also included in there some additional benefit costs which can be a little bit lumpy, but we think we've experienced the heaviest part here in the first quarter.

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

Thank you, good morning and congratulations on this showing. Couple of questions. First of all on the gross margin front your transport costs leverage nicely. What are you seeing in terms of container prices today? Are they as favorable as they were in the first quarter presumably things like fuel will if anything be better for you, but what is happening on the transport side? On the shipping side that is.

Part of our first quarter benefit came from the prices we paid in the fourth quarter related to the international container rates, they were lower on a year over year basis. In the first quarter if you look at things like the Shanghai containerized freight index, you saw international rates start to approach neutral year over year. Our blended average rate was still a little bit less in Q1 on a year over year basis, so while first quarter probably represents the maximum benefit on an international container rate, we may continue to see some benefits going forward but then expected to be flat year over year.

Got it. And then on the sourcing side, you actually had a bit of a tough sourcing comparison this quarter you had a bit of a bulge last year in the first quarter with some line reviews I believe kicked in and then the benefits got a bit more restrained at Q2 then gained momentum later in the year. Is it possible to try to size what the benefits and aggregate look like and do you feel like you have already identified what all of those might be or is that really a multi-layer process?

I'll answer that and then I'll turn it over to Dan. As we think about the sourcing initiatives as we talked about them last year, there were three phases to them and the initial one was really just getting in and assessing and approaching the vendors to participate in our marketing, our vendor allowances and rebates. That's why you see that compared to last year because we were pretty effective in that particularly with Sequoia contributing early on in the negotiations. So that's what we were up against.

I think what you're seeing now is as we've implemented the strategy it's gone into the line reviews, into the product cost, and as that flows through in determining the inventory you're seeing that will accrue when it comes through. The inbound freight costs helped a lot. The margin did help as well. The volume rebates were down, year over year, based on how those three phases of the strategy are implementing and rolling through the cost of goods.

Got it. Another question I have relates to the nature of the top line strength that you saw. Clearly when the company can execute like it is with no systems overhangs and it sounds just like a whole lot of organizational momentum that can drive top line. Clearly you don't exist in a vacuum and the data points that we've seen around you both from suppliers and other retailers have been pretty good. If you think about the kind of business that you're doing, whether it's business related that you can tell is related to home transactions, existing home sales, or to new home construction or finally just to the traditional remodel upgrade business. Where would you say, if you can put your finger on it, the incremental strength is coming from?

You're talking about externally or within us?

I guess within you and that might relate to the environment and I guess I'm asking you to look within your business.

To look at it considering our purchase occasion and how discretionary and big ticket we are, I think we probably would be less affected from external forces. But internally, really what's going on I think it's all about these opportunities we have to improve the business. Our continuous improvement mindset, the investing in our resources, our teams, and then aligning around those goals and driving and executing on our strategy. I mentioned in my notes that I feel better than ever about how the teams are aligned on some big initiatives. They've been communicated and accepted and bought into the organization from corporate office all the way down to every employee in the stores.

Our teams again are pulling together on those initiatives and executing really well so I'm pleased with that and why I called it out. I think that's probably what's going on behind the scenes. The organizational dynamic and the culture and the morale is really good. Stores are excited. They're making more money so they feel like they're winning.

What I would add there too is that we really do think broadening the reach and frequency of our advertising has brought in still the customer looking for remodeling. We've broadened the customer base, they're responding to the promotions and the stores are doing an excellent job of converting that interest into open orders and invoiced sales. I don't think there's been a change in the customer but we've broadened the base we're appealing to. From a macro standpoint there have been fits and starts for the rest of the year we're not looking for it to be any different than it has been in these last four or five months which I characterize as inconsistent and flat. I don't think we're looking at a downturn but I also don't think we're looking at an improvement either.

Then lastly and you sort of brought this up I myself have noticed it on the radio and then use media that we didn't use to hear your ads on. You seem to be able to broaden your advertising footprint without really accelerating the advertising spending dollar growth. So can you talk about the puts and takes for the marketing program presumably you've got your cost down, you're moving your advertising into those channels away from others so if you could talk about how the dollar allocation is shifting that would be great.

Sure Matt, this is Rob. The strategy going into the year was on a rate basis to reinvest what we typically levered in national advertising. So what we've been doing is two things. You've got the extra dollar from that and then also the reallocation. Looking at what we have been spending and can it be better applied. We tested it back at the end of last year, we did some things that worked and we were excited it about it and we continued it into the first quarter of this year.

As you said you've heard and seen some of it on the radio. I think the take away from that really speaks to our value proposition. Our value proposition has resonated with our core DIY customer, that's what the company was founded the on and it really makes a lot of sense now as we're kind of broadening that out. It's validating the value proposition and it's resonating really well with other customer groups.

Got it. Thank you so much.

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

I'd like to ask you about the comp gains that you achieved this quarter how you think that compares to the overall industry and do you think your impact gaining share or market.

Rick, I think everyone in the remodeling space is probably going to report a pretty good number in the first quarter. From what we've heard from the macro environment we think ours is a little less related to weather than some others might be. Ours is a considered purchase, long purchase cycle. Again, we've been building momentum through the second half of last year. We've broadened our reach and frequency, so we feel like we've been driving strong customer traffic with some of the promotions, some of the advertising we've been running, and we've been able convert that, so we feel like we've gained some market share in our space and that our comp number isn't really weather driven.

And are you seeing anything different from a competitive standpoint specifically from a Home Depot or Lowes and how do you think those retailers are doing from a share standpoint from within your category?

This is Rob. I don't think we want to necessarily speak to what they're doing with share. I will tell you it's a competitive marketplace, there are strong competitors out there, but as you go back and you look at our model, our value proposition and our store model. It's working, it's effective, it's resonating and as you can see in the sales growth and the comps within our stores. And that's what we're happy about.

As we've tried some of these new advertising and marketing strategies and expanding the reach and frequency of that existing value proposition, it's validating the value proposition. Some of these newer customers that may be a little greener than your typical core DIY'er and really adapting well to that value prop. The price works just as well with them. Quality and selection is critical. The availability of the product in the warehouse, in the store so they can take it with them if they want it really resonating. And the people.

That's one of the important things that we're seeing is that kind of synergy between the reach and frequency driving customers in and then as they engage our people, our people are world class and knowledgeable. They're free and available when you walk in to be helped. So I think we're happy with how we're competing in a competitive marketplace.

And Rob, could you talk about the promotional events? How they might have compared in the quarter, year over year and what the expectation is, what the plan is, as we move forward?

The events for the quarter, in terms of Q1, as they compared to last year, I think the incremental what you want to look at is really back to what Dan said. We layered in with our typical strategy of great deals, great pricing, the increase of reach and frequency of our advertising. We reallocated our advertising from less effective to more effective channels. We got a higher ROI on that so that worked.

So that works and obviously, you know if that's working we're going to continue to do it. We're going to stick to that cadence. We're going to stick to our overall plan coming into the year of reinvesting national advertising. And again, if we gain leverage it's should be just like we did in the first quarter on growth. On top of that reinvestment.

And any commentary on Q2 sales?

We're in the middle of the remodeling season here, and I think it would be premature to talk about how it looks so far.

Thanks a lot and good luck.

Our next question is coming from the line of Laura Champine with Canaccord Genuity.

Good morning, guys. I just wanted you to confirm, I think this is the highest gross margin you've ever posted and if you could talk about sustainability of it maybe particularly on the transportation cost front. It seems to us that the focus you have on sourcing and supply chain, you're just starting to see it pay off. It seems like this should accelerate rather than decelerate. If you could comment on that it would be great.

It is the highest gross margin that we've ever posted, and transportation costs going forward are going to be variable. As you know international container rates over the last few years have fluctuated pretty significantly. We do feel like some of the logistics initiatives that we'll implement going forward will begin to provide benefits, but still there could be a lot of volatility in those rates over the next year or so. I think Rob will probably join in but we think there are cumulative benefits from the sourcing initiatives that we're realizing but there are more to come.

I would agree with Dan. I think, Laura, Matt pointed out a good observation as you look back and compare the breakout of the gross margin to last year. Even within the cost of product, the difference between the vendor allowances and the cost of goods. Early on last year we were getting of it more up front in the allowances flow through now. I think with anniversaries now, the Q1 popping the allowances last year as we kicked everything off, so I would say you can continue to see things flow forward. I tell you, the exciting thing for us is the flexibility that it gives us in terms of what we can do for the long term.

As we reinvest into our value proposition, as we do things like we're doing with the reach and frequency of our advertising, we're out there building our brand, we're throwing our message, and it's effective. I want you to know that we're going to be prudent about that as we reinvest. We want to make sure we get the right return and it gives us our goal overall that as we accrue benefits we can reinvest some of the long-term support of that value proposition and differentiating us out there in the marketplace versus the competition and also driving the operating income which is a goal as well.

Thank you.

The next question is coming from the line of David Magee with SunTrust Robinson Humphrey.

Good morning, everybody and congratulations.

Thanks.

Two questions. One is I know you don't want to comment on the spring sales but it sounds like you also don't believe there was any pull forward effect because of the weather into the first quarter is it fair to assume that?

That's right, Dave. We've seen momentum build now since the second half of 2011. Given the nature of the purchase we just don't think that the weather had that much of an impact. It certainly didn't hurt but we don't think we pulled forward demand in the spring.

Okay. And then secondly on the EBIT margin, if our numbers are correct for this year, next year you're approaching and hitting all time highs on the EBIT margin line. With the gross margins being also at all-time highs, what's the visibility and timing in terms of trying to get the SG&A ratio to begin contributing towards that and improving the EBIT margin.

I would say that's an opportunity for us. As we drive continuous improvement in the operations, as we have identified and set up our strategic initiatives and priorities, that's definitely a priority for us over time.

I would add in, Dave, there's not a person walking these halls that doesn't realize continuous improvement means SG&A operating margins not just gross margin.

Do you think advertising costs next year could be an opportunity?

We want to continue to reinvest what we need to, to drive appropriate traffic so it's a little hard at this point to predict because part of that is going to be where we are from a macro standpoint and how effective some of the channels are, but that's the one place we don't want to look for substantial leverage. We want to continue to reinvest prudently and make sure it's the right strategy long term.

Thanks, Dan. Good luck.

Thank you.

Our next question is coming from the line of Peter Keith with Piper Jaffray & Co. Please state your question.

Thank you. Terrific results. I know there's been a couple questions on gross margin. Last year, if my notes are correct, you did get a very sizable benefit from the vendor allowances. Could you quantify on a basis point measure how much that was down year on year for the quarter?

We didn't break that out Peter, but you're right. When we launched these initiatives last year, we got a flood of participation from the vendors including Sequoia which was our largest partner at the time. And I think we called out that it was at least 75 points or so of benefit in the first quarter last quarter. It's harder to break out strict allowance from benefit once we acquired the QC QA operations from Sequoia and began working directly with the vendors in the third quarter. Some of those benefits that were volume allowances are now passing through as lower unit costs so it's a little hard to put it on a year over year basis.

Okay. Maybe another way to ask it would be, did Q1 last year see the largest benefit from those vendor contributions?

In terms of the vendor rebates?

Yeah.

Yes, I think so because as we continue to drive on the line reviews, again, Sequoia was a big contributor in that first one. So as we went through the process of aligning and then the subsequent acquisition of Sequoia that's what kind of drove some of that variation throughout the year given the size of Sequoia to the business at the time.

Right. Okay. Yep. And then you also mentioned that your direct store shipments are down a little bit year on year I guess it's a similar dynamic to Q4. Is that again just trying to fast track some of those Asia shipments to the stores?

Yes, Peter, it is. New suppliers for certain product lines and as that supply began to hit our distribution network we brought the initial loads here so that we wouldn't overstock it in the store and we could appropriately allocate to the store. So all part of the same optimization process and definitely still a strategic goal for 2012 is to increase our direct to the stores.

And lastly, on a similar topic. You've mentioned a couple times today that you've been building on momentum starting in Q3 last year. Does that imply that your momentum has improved as Q1 progressed?

You know, it's always hard with Q1 because March is such a significant month and January and February are so much smaller, but what we can say is that we did see strong results as we finished Q4 and we saw strong results in the last five or six weeks of Q1 which are probably the most important weeks of Q1.

Great. Okay. Thanks a lot and good luck going forward.

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

Yes, good morning and congratulations on a great quarter. Can you just talk about your outlook for hardwood prices?

Our ability to source direct with the mills and share our forecast results, the long-term nature of the relationship tended to stabilize our product costs, if not lower it as we gain economies of scale. We haven't seen any significant fluctuations in the domestic hardwood costs.

Okay, so forward outlook there. How much forward visibility do you think you do have on that?

Our buyers are usually working with the mills anywhere from 3 to, 6, 7 months in advance, so I'd say we've got a couple quarters. If there was a significant disruption in supply, it would certainly impact it, but we don't see anything that is materially disruptive coming in 2012.

Okay, good. Just in response to a previous question, you had indicated you were aiming to increase the direct to stores by the end of the year, can you share with us what that target might be?

Last year's target was 23%, or last year's actual was 23%, and we're targeting to beat that number in 2012. We're at 17% after Q1, so we have some work to do, but we've always thought that the upper 20's, low 30's is a potential and we haven't really changed that long-term thought process.

Is that a number that might have achievable in 2013 or is it longer than that?

I think as logistic initiatives are implemented and we've got a solid team in both product allocation and logistics, I think it's achievable number in 2013, but we'll see what market forces are at work.

This is Rob. What I would say is it's definitely imbedded as an objective and initiative within the supply chain optimization program. And again the timing and the impact from that, there's some linkages there, and some contingencies based upon as we've acquired our sourcing office there, as we diversify our factory base and bring in some new vendors and things like that. That's where you're seeing some of the direct slip. But we do have a long-term goal over multiple years to drive that number higher.

Okay. And just finally, Dan, in the past you've shared with us comps broken into buckets of 13 to 24 month 25 to 36, so on and so forth. Is there any chance we could get you to do that again here?

Dave, it's in the 10Q that we filed this morning. They're in one of the disclosures we talked about. I think it's about 20% increase in stores 13 to 36 months.

Thanks, guys, and congratulations on the progress.

Our next question is coming from the line of Jeremy Brunelli with Consumer Edge Research.

Hi. Couple of questions, thanks for taking mine. Just to beat the horse a little bit more, on spring pull forward and in context to, I would say continue conservatism on the outlook for top line, your customer invoices which is your measure of traffic actually decelerated on a two year basis. In the past you've shared with us leading indicators of demand. Can you give us a sense of what they're telling you today in terms of as we look at second quarter as you're heading into important selling season?

I will tell you that it's too early again to really talk about where or how the final numbers going to look in the second quarter. As we've said a number of times, with momentum build, we've seen interest be it website visits, catalogs, samples. The early indicators of demand have all been strong beginning in the second half of last year continuing through the first quarter. As far as the weather impact, I just don't think because of the nature of our purchase the large ticket discretionary well considered nature of it that the weather had significant pull forward impact from the second quarter into the first.

Thanks. On new store productivity, follow up on that. Is there anything to be said about, are you guys opening in bigger stores? You talked about better site selection. Are you opening in better markets? Maybe more dense markets? More affluent markets? And/or the timings of the openings, are they changing, are you opening them earlier in the quarter? Anything else besides the vintage that you spoke to?

The general approach there is that we're really assessing the whole real estate strategy and making sure it's integrated and we're contemplating as we go into a market, particularly an existing market, the existing stores, when their leases come due, how do we work those lease negotiations and a new store relative to optimizing the returns to the market. So that's really what's driving it. It's more of an integrated approach. So we've backed up and looked at it that way and we're pleased with the results. We're applying the tests this year as we remodel stores as we relocate stores we're looking at our assortment upgrades within our core categories and I think there's more to come there.

Got it. Thanks. Final question on gross margin follow-up. Your molding accessory mix up more than a point in the quarter and by my math that suggested potentially contributed 10 to 20 points. So if you could maybe confirm my math, and then within that delta to the 45, was there any portion incremental on promotion this quarter? You had a little bit last quarter, just trying to get at it how big the sourcing impacting was.

The numbers you've gotten from molding and accessories are reasonable and that's always been a goal of ours is to increase that attachment rate. We think it's an important competitive position is to have the full assortment available for the customer. We don't break out the sourcing initiatives from the mix. The moldings and accessories weren't really the only mix, but there's still migration as you can tell from the average sale down to some of the lower average price points, products, some of which on the premium side, carry higher gross margins. But certainly the sourcing initiatives played a beneficial role and as Rob said we're going up against probably the highest hurdle from 2011 here in the first quarter of 2012.

The only thing I would add is that those sourcing initiatives and line reviews will also play a role within all categories from a cost perspective.

Great. Thank you very much.

Our last question is coming from the line of John Baugh from Stifel Nicolaus.

Thanks and congratulations on the gross margin and the execution. I was wondering on the add and broad reach, obviously you saw the traffic increase, so it's working. I'm just wondering if there's any way to assess what type of consumers coming in. Is it less than a DIY'er than before? Is it more of a female mix than before? I'm just curious on that.

I would look at it as we're working up the curve from the core DIY'er to the more casual DIY'er. The general feedback that we would give you is that we're excited about the value proposition and it's effectively resonating with a broader group of consumers. And I think common sense would tell you as you go towards someone that may be less confident and less comfortable in a big ticket home improvement, truly doing it themselves, you can where see in our value proposition as you go through it and down it to the people, as I've talked about, will really resonate with them. And that's what we're seeing.

We're seeing customers that are coming in, and they're coming in and they're looking for high quality. You saw some of the mix changes that Dan talked about. They're looking for good high-quality product. They're looking to be helped. They're looking for installation. We've got all that. We can provide the service and expertise and confidence and the warranty and support behind the scenes program that they're looking for to give them the confidence to buy.

Do you see a higher mix of customers choosing your in-house installation in the last year or two?

That attachment rate has gone up every month or every quarter really since HSS and Lumber Liquidators have joined together. So we're pleased with the service they provide. I think the customers have been pleased with the service provided and we have seen an increase in that attachment.

Lastly, have wood sales turned around at all? I presume now that we're still doing more laminate and bamboo, and LVT. But maybe refresh us on where that mix is today versus the peak five or six years ago.

We really haven't seen a lot of recovery you've seen our average ticket roughly flatten out here. It's not moving dramatically. You think you'd see an increase in the average sale as the hardwood customer comes back. We've been stubbornly on the sidelines. We've certainly seen increases on some of the lower average retail price points as you've indicated and moldings and accessories continue to grab the mix. So we had to break out in the K and with the average sale roughly flat here in the first quarter you can kind assume the same mix didn't change all that much.

John, the thing I would add as I'm in the stores and talking to customers is that customers continue to be value conscious, and I think that's a big part of it. As you look at the non solid assortments and those categories in terms of the quality, the technology, the product innovation that's out there that our merchant teams are identifying and bringing in, they are appealing to our customers. I think there's that too, there's been this growth within the industry and within our business as well in those items in those categories and the technology has enabled it as well. Not just I think customers being cost conscious.

So then, we'll just close out that mix of engineered maybe is going up versus solids.

Engineered as been stronger than solid.

There are no further questions at this time, I will now turn the floor back to management for any closing remarks.

Thank you 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, and thank you for your participation.