LL Flooring Holdings Inc (LL) 2013 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. Robert Lynch, President and CEO; Mr. Dan Terrell, CFO; and Ms. Ashleigh McDermott, Director of Financial Reporting. (Operator Instructions).

I would now like to introduce Ms. 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 Securities Law 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 date. Lastly, Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now, I am pleased to introduce Mr. Rob Lynch, President and CEO. Rob?

Thank you, Ashleigh, and good morning everyone. I am here with Dan Terrell, our CFO, and we are pleased to be speaking with you about our first quarter results, which have 2013 off to a strong start. On our last earnings call I spoke of a solid foundation we had established in 2012 and the strength of our world class team. I also noted that we had implemented key strategic initiative to drive our top line, expand gross margin and leverage our investments with a goal to deliver sustainable increases in our operating margin for years to come. Our first quarter reflect the continuing benefit of those efforts.

Within our first quarter results I am most pleased that our strategic initiatives are integrated and working together creating a cumulative benefit across the sales cycle and the business. While it sounds simple, it reflects the benefits of our focused efforts over the past year and is very exciting. We believe that our value proposition is reaching more consumers interested in a hard surface flooring purchase as we broaden our advertising reach and frequency.

Those customers select from our industry best combination of assortment, quality, pricing and availability due to the efforts of our merchandising team and the strength of our direct sourcing relationships with our mills. The customer is then assisted by an expert sales force and support system, which have never been stronger due to our best people initiatives. We emphasis a complete ticket to satisfy the customers' needs from the flooring to the moldings, accessories and tools needed to install and maintain the floor.

Finally our products are delivered in a more timely, accurate and efficient manner due to our efforts to optimize our supply chain. Successful implementation of any one of these initiatives will drive sales or grow operating margin, but working together we believe they create a compounding benefit that we are seeing in our results. Our team is more passionate and energized than ever, and is operating with a unified vision that we believe will allow us to realize the significant opportunities that lie ahead.

Further building on the solid foundation we have established across our organization, we also completed the roll out of our first stores in our store of the future design. Through March 31st we had opened five new stores in this enhanced format featuring a larger show room and expanded merchandise assortment. Additionally we successfully remodeled six existing stores, including the relocation of four stores within their primary trade areas. While still early, we are pleased with the performance of these 11 stores, and the group is providing us valuable information on customer acceptance, conversion and operating efficiency.

Now turning to our results. Net sales for the first quarter of 2013 increased 22.5% to over $230 million, and comparable store net sales increased 15.2% representing the largest quarterly increase since the second quarter of 2006. The power of our selling initiatives is clearly visible when looking at the drivers of comp sales with an equal contribution from increased traffic and higher ticket.

We believe we are now reaching a more casual customer in addition to our core DIY-er, and our message is resonating with both. Our expert store sales teams supported by our value proposition and equipped with improved selling strategies is turning that interest into a more complete sale through greater conversion to premium products and the attachments of moldings and accessories to complete the ticket.

While stores across our comp base are performing very well, I want to note there are a number of stores in the Northeast which we believe are benefiting from the recovery efforts from Hurricane Sandy. Dan will provide more detail around the estimated sales contribution, but more importantly we are very pleased to be a long-term part of these communities and play a role in helping to rebuild our customers' homes.

Our gross margin improved 310 basis points to a record 40.4% driven by a number of cross functional strategic initiatives that we have been working on over time. These initiatives rely on both the strength of our team and our direct sourcing relationship with our mills. And we believe most if not all will yield cumulative multiyear benefits.

We would not have achieved a level of performance in the first quarter that we did without our focus on continuous improvement, which when combined with our initiatives to expand gross margin drove operating margin up nearly 400 basis points to 11%. As result net income for the first quarter increased 92.5% to $15.8 million or $0.57 per diluted share.

I must say I am very pleased with our team's performance in the first quarter across the board. As we look forward we continue to be committed to investing in our core business and in the programs that will capture future share our fragmented market. That said, our focus on continuous improvement ensures we are using resources efficiently and in a matter aimed at producing the greatest long-term returns. With that, I would like to pass the call over to 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 remained of 2013. My references to percentage and basis point changes are in comparison to the first quarter of 2012 unless otherwise noted.

As Rob noted net sales increased 22.5% to $230.4 million with an increase of $28.5 million at comparable stores and $13.9 million at non-comparable stores. At comparable stores the 15.2% increase in the current quarter follows a 7.5% increase in the first quarter of the prior year, and we are particularly pleased to get a 7.3% increase in both the number of customer invoiced and the average sale.

As we have discussed on previous calls, driving traffic has been a key strategic focus for more than six quarters now, and the current quarter increase follows a 8% increase in the first quarter of the prior year. We continue to believe our efforts to expand our advertising reach and frequency have resulted in greater recognition of our value proposition both by our core DIY customer and across a larger population of consumers considering a flooring project.

Our average sale in the quarter was $1,620 with an increase from $1,510 in the prior year primarily due to a 6.5% increase in the average retail price per unit sold. Changes in the sales mix of flooring products, including continued customer preference for premium products, increased discipline at the point sale and increases in the sales mix of moldings and accessories all contributed to the increase in average retail price per unit sold.

A note on the impact of Hurricane Sandy. Within our comparable stores we have identified seven store locations serving communities recovering from the effects of Hurricane Sandy and as result experiencing significant increases in net sales. We believe the incremental contribution to net sales from these store locations raised total comparable store net sales by 125 basis points to 150 basis points in the first quarter of 2013.

Store base expansion is also driving our top line. We have opened 30 new locations since the beginning of 2012, including five in the first quarter 2013, which compares to four in the first quarter of 2012. As Rob noted all of the new stores open to date in 2013 are the expanded show room store of the future design. These five locations were opened in existing markets; in New York, Virginia, Texas and Tennessee. The results are very early, but we are pleased with the performance and we are on plan with regard to location size and invested capital.

Within our comparable stores we have remodeled six locations to the store of the future format, including the relocation of four stores within their primary trade areas, one rebuild in Atlantic City, which we have grouped with the Hurricane Sandy recovery stores and one remodel in place. Again, it is still early, but overall we are pleased with the results, and our transition teams have minimized interruption in operation.

Turning now to our gross margin, which increased 310 basis points to 40.4%, as net product margin contributed 350 basis points of improvement, transportation costs were neutral and all other costs reduced gross margin by 40 basis points. Within product margin we again see the beneficial impact of a number of initiatives working in unison including sourcing initiatives, changes in our sales mix and a higher average retail price point per unit sold.

Within transportation we generally saw high rates for international containers and domestic fuel offset by certain supply chain efficiencies, including lower delivery charges, greater unit efficiencies from our distribution centers to our stores and a significant reduction in the number of units transferred between stores.

Finally all other costs had a net adverse impact on gross margin of 40 basis points primarily due to greater demand for flooring samples, our increasing commitment to product quality and a higher reserve for product obsolescence due primarily to the launch of certain new products and mill transitions. These cost increases were partially offset by lower cost for inventory shrink including reserves.

Selling, general and administrative expenses for the quarter increased approximately $10.8 million or 19% to $67.6 million due primarily to higher net sales and growth in our store base, but as a percentage of net sales fell 90 basis points to 29.3% from 30.2% in the prior year.

Salaries, commission and benefits increased approximately $4.1 million, but as a percentage of net sales fell 70 basis points to 12.4%. Leverage of our corporate infrastructure and distribution center operations was partially offset by greater expenses due to store base growth, higher commission rates earned by our store management, higher benefit costs and larger accruals for management bonuses.

Advertising expenses increases 29.7% or approximately $4.2 million and as a percentage of net sales increased 40 basis points to 8%. As both Rob and I have mentioned we continue to reinvest in our value proposition and aggressively pursue market share by broadening our advertising reach and frequency. Partially offsetting these increases is leverage of our national advertising campaigns over a larger store base and allocation of our investment to more effective media channels. All remaining SG&A expenses including occupancy, depreciation, overhead and stock based compensation increased approximately $2.5 million, but as a percentage of net sales decreased 60 basis points to 8.9%.

The effective tax rate was 38.4% in the first quarter of 2013 compared to 38.6% in the first quarter of 2012. Net income for the first quarter 2013 increased 92.5% to $15.8 million or $0.57 per diluted share based on approximately 27.8 million weighted average diluted shares outstanding.

Our cash and cash equivalents increased to $72.7 million at the end of March up from $64.2 million at the end of December and $61.4 million at the end of March 2012.

Merchandise inventories totaled $210.1 million at March 31, 2013, an increase of 1.6% over the yearend level and 9.6% over prior year's quarter end. We built available inventory per store to $615,000 at the end of the first quarter up from $578,000 at the end of March 2012, and as a result we are well prepared to meet the spring demand and potentially drive top line through enhanced availability of certain product categories. We are now targeting available inventory per store to end the year between $605,000 and $625,000 with variations based on seasonal demand and product availability.

Capital expenditures totaled $2.6 million for the first quarter down from $3.2 million for the first quarter of 2012. During the quarter we repurchased 70,600 shares of our common stock on the open market at an average price of $54.34 using $3.8 million of cash.

Turning now to our updated outlook for 2013. We now expect net sales for the full year in the range of $913 million to $942 million up from our previous range of $885 million to $920 million. We expect a comparable store net sales increase in the mid to high single-digits. We believe the store locations impacted by Hurricane Sandy will benefit comparable store net sales by approximately 60 basis points to 100 basis points for the year. We continue to anticipate opening 25 to 35 new store locations in 2013, and converting 20 to 25 existing stores to our store of the future format through a combination of remodel in place or relocation in the primary trade area.

We now believe gross margin for 2013 will expand 100 basis points to 160 basis points over the 2012 level. Finally we now expect 2013 earnings per diluted share in the range of $2.10 to $2.35 based on a diluted share count of approximately 28 million shares exclusive of any future impact of our stock repurchase program up from our previous range of a $1.90 to $2.15.

I will now turn the call back over to Rob for his closing remarks.

Thanks, Dan. Again, we are pleased 2013 has begun on a strong note, but we continue to be just as excited about the future and the long runway of opportunities we believe we have ahead of us. Our team is energized, united and focused. I felt the energy and passion at our Lumber Liquidators University held in February our first that united all store managers throughout the Company in one location. As one team we set strategic goals, conducted enhanced sales training courses and grew even closer together. We are seeing tangible results from our best people initiative, and we plan to continue investing in this initiative and conduct this event every year. We are confident we have the right team and structure in place to best meet our customers' needs.

Further we believe our business is positioned to capture significant share in our fragmented market in the future. Certain economic indicators suggest home improvement is somewhere between the end of a more than five year contraction and the beginning of what could be a multiyear recovery. In any case, we anticipate that consumer demand may be volatile and will continue to be price sensitive. However as we move forward we believe we remain well positioned to further expand our footprint and deliver multiyear expansion of our net sales and operating margin.

Before we turn the call over for your questions, I want to thank our entire team across the U.S., Canada, and Shanghai for their dedication to strengthening our value proposition of price, selection, quality, availability and people. And most importantly for their strong and united commitment to continuous improvement in all that we do.

Operator, we are now ready for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Gary Balter with Credit Suisse. Please proceed with your question.

Thank you. First of all, Rob, Dan, congratulations on a great quarter.

Thanks, Gary.

A couple of housekeeping numbers questions on a bit of a longer term. The 100 basis points to 160 basis points in gross margin because previously you were like we have had these great gross margin improvements we should not assume that much. Obviously you had a very strong Q1. In your guidance what are you thinking drives that? I will not say I think it will be higher, but I will just focus on the 100 basis point to 160 basis points.

Gary, this is Rob. I will start big picture with some of the initiatives we are working on and Dan can chime in. What I would tell you is going back a couple of years ago when we first started talking about the opportunity for gross margin and the line reviews and the Sequoia acquisition. Under our umbrella of driving continuous improvement in all that we do we have expanded that, and what we have now as I mentioned in my comments is we have a number of strategic initiatives that go across almost every function in the Company. They are all working together.

As Dan mentioned you heard that margins are being impacted by things we are doing in merchandising, what we are doing in the stores in terms of the selling and the training there, you saw the average selling price was up this quarter that was one of the positive surprises we saw I think as a direct result of the Lumber Liquidators training and the focus on our best people the stores going back into the field and implementing those initiatives. Again, what I would tell you it is a comprehensive set of strategic initiatives that go across almost every function within our business that can actually impact gross margins. That is how we are looking at it, and that is where we are getting some of the extra benefit from.

Gary, I would just add when we put out our guidance after the last call, we felt like 140 basis points was going to be the max input for the year. Q1 always has the greatest step up built in just because on a one year and two year stack basis it had the lowest increases. We thought we had would have a relatively strong Q1. The comparisons get a little hard for the next nine months. But certainly as Rob said a lot of factors contributing, really pleased with what we saw and now it looks like 100 basis points to roughly 39 for the year is going to be the floor and what we feel is about 39.6 or so on the upside.

Thank you. Not strategic, but advertising obviously has been -- you have talked a lot about the push on advertising and it seems to be working in terms of driving in additional customers. How should we think about going forward advertising? Is there a point where you picked up to a level that you are more comfortable with and we start to see some positive leverage from it?

Gary, this is Rob again. We were testing new concepts to drive our reach and frequency going back probably five or six quarters now and fully implemented those initiatives last year, and we are very pleased. I think last year in one of the quarters or so as we were learning and moving forward there were a couple of quarters where we thought we might have left something on the table.

I would tell you that I am very pleased with the performance in the first quarter with the balance of the spend on advertising, how aggressive we were going out there in terms of taking market share and expanding our message and in terms of the comp sales results. Based on that and what we have learned the last six or seven quarters I think we are going to look to maintain going forward. And I am pleased with how that is looking in terms of the plans, initiatives and tactics under development.

On that, what are you learning that is bringing in customers that otherwise would not be Lumber Liquidators customers; is that the primary?

I think that is one of it, but I would tell you the real exciting thing is it is really a testament of our value proposition. How relevant it is. That is what has made this Company so strong. It was a powerful value proposition when I came to the Company a couple of years ago. And what we have been doing very simply and basically is focusing on that value proposition. Every thing we talk about every initiative that we describe to you here or we will describe to you is focused on investing in that value prop and focusing on.

And I think what is happening is strategically last year when we shifted from the tactic of leveraging advertising to going back on offense anticipating our ability to grow our market share given how low it was that paid off. The marketing team has done a fabulous job in terms of implementing and using those extra dollars, and yes our existing customer base, our value prop is resonating with them but also with new customers as well.

Thank you.

To make it simple the marketing team is driving in more customers, our sales force is getting increased training and they are converting and selling, our assortments are better, our prices are better and that whole value proposition is working together all of the initiatives not just the marketing to get these results.

Thank you very much.

Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with our question.

Thank you. Good morning, and great results again. I wanted to ask about some chatter we are hearing about industry price increases. Certainly you and myself and others get questions on the data of point that lumber prices are going up. Traditionally that has not impacted you, but we are now seeing that some of the other branded hardwood manufacturers are raising price. I note those are not suppliers for you. So wondering are you being impacted, or maybe does this put you in a better competitive position if some of the other retailers around you are having to pass through those price increases?

Hi, Peter. This is Rob. I will take a shot at that question. The first thing I would tell you is our sourcing strategy and merchandising strategy are really focused on buying direct from the mill, no middle man, going direct to them, so that is one thing that helps us. The other thing as you have noticed the last couple of years, we have been expanding our global sourcing operation; acquiring the office in China, we diversified our mill base within China within all of Asia. We did the same thing in Brazil, in South America I mean, taking over operations there and expanding to other countries within South America.

And mostly recently we have also expanded into Europe, and are sourcing there now from several new partners. So, again, the focus is on global sourcing direct to the mill and having the best people managing those processes. Relative to the specific costs you are talking about, what we have seen is they are mostly in domestic hardwoods. One thing that insulates us from that is, again, we go direct to mill, and that is one category amongst a diversified mix that we have actually been expanding in our business, so it is a smaller components of our mix than mostly all of our other categories, so we are not seeing much of a hit there in terms of the diversification of the mix.

Are you seeing some of your competitors where you do active price checks that the competitors are having to raise price relative to yours?

Peter, this is Dan. I do not think we have seen many of the primarily competitors taking price increase. They may have some margin impact if they are getting a price increase, but we have not seen anything on the retail side.

Okay. Great. Thank you. I wanted to also ask about the mix shift within the moldings and accessories. It looks like it was up 260 basis points year-on-year. Is it fair to say that that mix shift is accelerating, and if you could talk about if so, what is driving that and do we have some sustainability in that mix shift?

It has accelerated. We are pretty pleased with what has been taking place there. I would say the number one driver is our people. The processes that serve the people and then maybe some of our product introductions to expand the assortment in that order. The people, the training , the enthusiasm they have for completing the entire ticket from moldings to noise reducing underlay to other accessories including tools now certainly an important part of what we do. The supply chain which has become more far efficient, more reliable, accurate gives the store the confidence to sell those moldings and accessories. And then the assortment of what we are selling has broadened over the last two years. So we are comfortable with all three working together, and believe there is still upside to that number.

Okay. That is great guys. Keep up the good work.

Thanks.

Our next question comes from the line of Matthew Fassler with Goldman Sachs. Please proceed with your question.

Thanks. Good morning, guys. Obviously a phenomenal quarter here. A couple of questions on the numbers. You modulated ad spending such that it grew a bit more than sales and presumably some of that was planted in front of the quarter and some of it was modeled, some of it transpired as the quarter went on. How are you budgeting advertising expense relative to sales for the full year? Should it be level with a year ago, would you expect it to leverage if the business remains this strong?

We are modeling for some deleverage there, Matt, certainly there is an opportunity to bring it back to level with the prior year. But our modeling is for deleverage. One good thing about our ad spend is it is dynamic and flexible, so we can react within a quarter. We do not book a lot of programs multiple quarters in advance, so there is flexibility there, but the way we are looking at it is this is the right time to gain that share, to press that advantage.

Second question relates to stores of the future and your new store program in general. By our calculation your new space productivity was as a percent of the base was higher here in the first quarter than it has been in many, many years. And I realize that the store of the future proto type has only been opened really recently and that calculation tracks trailing four quarter numbers, so presumably the bigger they are as percent of that mix the more constructive they are.

What is the sales productivity of the store of the future like compared to say a mature store? So if you open up one of these new units and your average store across the chain is annualizing at a little under $3 million or this year a little over $3 million what kind of year one volumes do you expect or are you seeing from those boxes as best you can tell?

Matt, I will start and maybe Rob can add in. We certainly are seeing increased new store productivity and it was a record for us. Part of that is because all of the stores were open in existing markets which tend to have a higher sales ramp, also a testament to the real estate strategy we have had in place for about year and half or two years just selecting better sites to deal with the more casual customer, less of a treasure seeker. With the store itself we do not think a store of the future is going to exceed an average mature store. Certainly have been pleased with the performance, but as these new store of the future formats go in both existing and new markets we just do not think it is going to be higher than an existing comp.

I guess saying it won't be higher sounds like the day of new space productivity in the 60s or maybe in the low 70s are probably behind us so long as we roll these out there is a period of somewhat better productivity relative to the base?

I think we are closer to making that assumption than we ever have been, but we are going to need to see another couple of quarters worth of activity.

Got it. And then just one follow-up on that. Obviously the real estate costs are going to be somewhat higher and if you look at the first quarter the occupancy costs per foot was up about 4%, which is also a bigger increase than you have had, so should we think about that kind of trend continuing or persisting throughout 2013 or beyond?

I think that is fair.

Okay. I will go back in queue for the rest. Thank you so much.

Thanks.

Our next question comes from the line of David MacGregor with Longbow Research. Please proceed with your question.

Good morning. This is in Zoran Miling in for David MacGregor. Congratulations on yet another strong quarter.

Thank you.

Just a few questions from me with regard to the payroll we certainly saw some leverage there over the last two quarters after a period of slight deleverage. As we look through the balance of the year should we continue to expect that that will be a source of leverage for you guys?

It was in the first quarter, but when you look back at the first quarter 2012 you saw that it had an unusually high expense percentage. So we were pleased with the leverage we did get on it, but what we modeled for the rest of the year is roughly flat to prior year.

Thank you. And then just with your advertising focus a little bit more on the casual consumer here. Could you briefly talk about the differences between the casual consumer and that core DIY-er particularly as it relates to the expected average ticket or any other metrics that you may look at? Is there any kind of material difference between those customer segments?

Yes, they are different customer segments. Because the core DIY-er is the person that is more confident, takes on big projects on their own, has experience doing them. I think in the early days of the Company and industry before the technology improved and made it easier to install it yourself, that was the main focus of where we were targeting those customers. The casual consumer is a very big market, actually bigger than the do-it-yourselfer. The exciting thing that we are seeing and learning from the advertising and talking to these customer is our value proposition as powerful as it is with the core DIY-er, it is actually more relevant with the casual consumer, so it is as good or better fit and match.

As the marketing team targets those folks and gets them into the stores they come in, they actually need more personalized assistance with our world class sales team. They need more help with the installation, with being engaged and qualified about what they are really looking for. A lot of them do not even understand the differences in a lot of hard surface flooring. We are really happy with it. It is a pleasant surprise, and those customers are getting exactly what they need in our stores.

Great. Thank you so much for taking my questions.

Thanks.

Our next question comes from the line of Brad Thomas with KeyBanc. Please proceed with your question.

Thanks. Good morning, guys. I wanted to follow-up with the line reviews. I think we are at the point now where you would have been anniversaring the initial China line reviews flowing through the P&L. Are we at the point where the initial reviews with China have now been anniversaried, and what are you seeing as you go back for second round of discussions in that region in particular?

Brad, I will start and let Rob fill in. We are anniversaring really almost a second year of some of the initial line reviews. I think we did our first in early 2011. The specific to China we have anniversaried a great amount of the impact from line reviews. We are certainly going to look at going back through our merchandise assortment over and over. But certainly through the Asian sourced product the first time.

Okay, great. And then as a housekeeping item on the customer deposit, it looked like that was up 9% year-over-year, your comps obviously accelerated from the fourth quarter. Are you guys doing a better job of getting product to your customers faster, or what is going on that would maybe lead to that discrepancy and growth?

The customer deposits always a snap shot in time. Part of it is a reflection of how we close out the quarter whether we are having a promotion or not and whether that is an A, B or C event. But just as you said certainly our inventory levels were in much better shape. Going into the quarter we were in front of Chinese New Year, we were prepared better to serve the beginning of the spring demand, and I think we did throughout the quarter a better job of satisfying that demand and reducing the age of the outstanding deposits and that is one of the reasons it went down.

Very good. Thanks guys and keep up the great work.

Thanks.

Our next question comes from the line of Matthew McGinley with ISI Group. Please proceed with your question.

Good morning.

Good morning.

You had a comment in the 10-Q that you have had higher sample costs due to more sample requests, and while that comment is not unique I believe it was in there before and you have brought this up before in a call. I guess two things on that; one, you said it a year ago when you were doing a line review that vendors were going to provide more of these samples at cost or for free. It is more of that occurring? And then on the actually number of samples that have increased, how much have they increased? And as you look at this relationship in the past without having context in the terms of the number of samples in the past, how should we think about that correlating with your comps?

Matt, the cost per sample has certainly gone down because more vendors have participated in the allowance program. And the fact that the expense overall has gone up will tell you that the unit growth has exceeded what the reduction in the cost was, so it is a sign of good things. Sample is one of the early indicators of demand. We believe if we put a sample in a customer's hand we will eventually get that sale, so we are really pleased with the sample volume we saw throughout the first quarter.

Good. And then on your cash balances, you have the highest cash balance I think you have ever had. How much cash do you think you need to run this business, and how do you plan to redeploy that at some point or just continues to build? Are there acquisitions you would make, do you have a targeted cash balance or do you plan to complete that $50 million, probably $45 million now, repurchase authorization you have sooner rather than later?

Well, it is the highest cash balance we have had at the end of a reporting period. We are cash flow positive. We are fortunate our store model throws off as much cash as it does. That said, we are always looking to deploy capital first to the growth of the core business then look for other ways to enhance the business. We are always looking at strategic acquisitions. We have not found one that has made sense other than the Sequoia acquisition in China.

And we are pleased to have that share repurchase in place to return excess cash flow to the long-term shareholders, and we think that is the strategy we will continue to employ looking forward.

How much cash do you think you actually need to run the business? If you looked forward and said I have to have X amount on my balance sheet, what is that amount?

There are some seasonal swings that give us more or less comfort, but clearly where we are now provides us with enough comfort to operate the business.

Okay. Thank you.

Thanks.

Our next question comes from the line of Laura Champine with Canaccord. Please proceed with your question.

Good morning. We are trying to dig into the very strong gross margin that you reported, and one number that we usually get, which I did not see, is the moldings and accessories as percentage of the mix. Can you disclose that for this quarter?

Yes, Laura, it was 17.6%, up from 15%.

And the 15%, I am assuming that was year ago because I think last quarter you were 130 basis points lower than 17.6%; is that right?

That is right. It is year-over-year.

Can you quantify how much, because I know there are some other factors within mix than just this moldings and accessories number? How much did mix benefit gross margins year-on-year this quarter?

In the first quarter I would say mix was probably hand in hand with retail price discipline at the point of sale and then probably the third factor was the lower product cost related to the sourcing initiatives. Again, the training and the programs working in unison, the efficiencies of the supply chain and the excellent work they are doing to get it to the sales floor and the support the sales floor is feeling and then the enhanced selling techniques and best practices are really looking to drive that average retail price point realized.

So that has been a strong contributor in Q1. The mix is along those same lines. Merchandising assortment is a much more logical - good-better -bella layout. The customer sees the price differences, the changes in quality through the assortment and store is better able to communicate that and look to upsell as well. So sales mix to premium products and attachment of moldings and accessories both probably still a function of continuous improvement and our focus on it.

Dan, it almost sounds like from your answer your efforts, Lumber Liquidators efforts, to better train its sales force are driving more margin expansion than the line reviews at this stage; is that a fair characterization?

It is much stronger than it has been in the past. We have seen with the launch of the best people initiative better training, and I think we were all really excited with what we saw at LLU, just the sharing of best practices throughout last year and again in the first quarter of this year. The feeling of everyone learning new selling techniques, how to better take care of the customer. It is certainly strength we see. We expected to see it, we probably saw it a little earlier than we anticipated.

Okay. And then one more question. I will leave margin alone. The guidance you have given this morning on the call implies a sequential decline in the gross margin rate. I do not understand why that would happen seasonally. Can you explain to me what might drive that?

When you look back over time Q2 has always been the lowest gross margin of the year or traditionally has been the lowest gross margin of the year mainly because of the big April sale that we run and there are some other Tier 1 promotions just as we go through that April, May, June time period. So I think if you look back over time, you are going to see Q2 has traditionally been weaker, Q3 can come back to Q1, and then Q4 is a little bit of a dip off of Q3. We certainly anticipate cumulative multiyear benefit for years of gross margin expansion but Q1 the timing of some of the items was stronger than we expected and we do not see that same sequential build could be the high of the year.

Got it. Thank you.

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

Good morning everyone. This is Joseph Edelstein on for Rick.

Hi.

Could you perhaps talk us through the month to month trends particularly as we saw housing turnover slow in March on the lower inventories?

Joe, we really did not see any dramatic shift through the quarter. It was consistently strong. We saw a nice pattern throughout. For us the spring remodeling traditionally starts in the second half of February towards the last week of February and March is one of the strongest organic months we have. And on a year-over-year percentage basis we really did not see much change through the quarter.

That is great to hear. And could you tell us early indications of how sales are trending into April?

We are not really talking a lot about April or the second quarter yet except to say we were consistent in the first quarter, and certainly the samples number being up is a strong indicator that there is demand there.

That is great. And then if I can ask another question, just broadly speaking on the competitive landscape. I think there was a question earlier about pricing and whether or not your competitors are starting to take up price. But are you seeing any irrational behavior of any sort, or just generally how are you thinking about the growth that is occurring with some of your other competitors relative to your own plans?

This is Rob. What I would tell you is we definitely are very aware of our competition. We are out there shopping them all the time in the stores me personally as well. What I would tell you is to your question not seeing anything really irrational, not a lot of significant change. We see different competitors focusing on the category at different parts of the year. Seasonally it is pretty consistent with what we have seen in the past.

And we are excited about where we play, how relevant our value proposition is and we are excited about the low market share we have in this industry. It is a fragmented industry. We have a relatively low amount of market share, which is why we think our growth potential is significant for a number of years. That is why last quarter we raised our potential in terms of U.S. domestic store count, and that is why we are on offense and aggressively pursuing new customers with our marketing.

Just as you think about where we are in the cycle, would you have an appetite to bring on any debt to help fund perhaps an accelerated store plan to get to that 600 store target?

This is Rob again. What I would tell you is first of all based on our business model and the way it generates cash that would not be a constraint. The constraint would be really our strategic plans driven by our team's ability and the resources and the infrastructure you need to ramp that up and do that. We are excited about our growth opportunity long term in terms of the total number of stores.

We are really excited about this new store the future concept and what that is doing. We are being very thoughtful and focused on how we are testing that, where we are seeing the results of that and that is going to drive our real estate strategy going forward in terms of the combination of new stores versus remodeling stores in place or relocating and remodeling stores. So for us it is a win-win. We have opportunities in both areas in terms of new store growth and in investing in our existing asset base.

If I may, one more question here. You did mention the remodel opportunity, so I am just curious how much lift the remodeled stores provided perhaps above the chain average in the quarter?

It is early to tell. We have 11 of the stores of the future in place just in the first quarter. I would tell you we are monitoring them carefully. Dan and his team's measuring the results, we are measuring the results in the new stores as we go into existing markets and we are also measuring the ones we have remodeled in place or we have remodeled within the primary trade area of where we relocated them. I would say stay tuned. We are pleased as we said. And we are going to stick to our strategy as Dan mentioned all new stores this year and all the remodeled stores will receive this format.

There is just one other thing to pay attention to in the remodeled is that there is going to be some interruption in existing operations if a store is relocated, if a show room is being remodeled, there is some short term pain, long term gain. As we roll through the quarters we will look at whether the stores are neutral in the quarter, they are remodeled, whether they are positive or whether they are negative.

And the degree that becomes material we will talk about it. But understand that there is some interruption to operations. And in my prepared remarks our team has done an excellent job of trying to minimize that pain, and certainly we will put resources towards it and learn as we go.

Great. Thanks for taking my questions, and congrats on the quarter.

Thank you.

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

Thank you, and my congratulations as well. If you could comment at all, I know the new stores have a greater mix of accessories, are you seeing a higher rate out of the gate of accessories sales there relative to the core stores?

John, they do have a broader assortment because of the additional square footage on the sales floor. I think the best way to say it is stay tuned, we will see how it goes once we see some of the results come in. It is early still, so the results are so young that it would not make a lot of sense to comment on them here. But certainly with the store of the future format there is a broader assortment of accessories as well as the hard surface flooring and staircases and butcher block and things we have carried all along.

Okay. And then on pricing the increases you referenced is that a function of the discipline, i.e. you did not discount? Were there products where you actually took price increases presumably because the cost inflated or was it the former?

It is generally the price discipline, so it is not the average retail price offered but the average retail price sold. Stores just did a better job of communicating the value, particularly as you attach moldings and accessories, as you sell premium products. When you think about it, it all comes back to supply chain. You do not have to discount retail price if the truck has the product you expected it to have on it. So a lot of our sales are booked in advance and then the product is shipped against that open demand, and reliability and accuracy are extremely important and you are able to hold the retail price if that truck is accurate and reliable.

And then my last question is simply on the mix. Are you seeing continued gains by category, i.e. laminate versus hardwoods? Is that a positive mix influence still on gross margin, or is it fairly neutral there but you are continuing to see within each substrate or category increasing mix?

We have not seen any kind of dramatic shift in the actual merchandise categories themselves. So it is really, as you noted, it is the move to the premium products within each category.

Great. Thank you for that color. Good luck.

Thanks, John.

Our next question comes from the line of Budd Bugatch with Raymond James. Please proceed with your question.

Good morning, Rob. Good morning, Dan. Good morning, Ashleigh. It is TJ McConville filling in for Budd. Let us add our congratulations on the really strong quarter as well.

Thanks, TJ.

A couple of nits. It is tough to find anything to pick at in here, but Dan, did notice the cannibalization ticked up modestly in quarter, and now given the discussion we have been having on the productivity of the stores of the future talk to us about what you expect that metric to look like as you open more and more of those over time realizing the emphasis on the real estate strategy takes that in to account these days.

I tried to call out in my prepared remarks that all of our new stores in 2013 were opened in existing markets. When you look at the spread between new and existing markets over the rolling 12 month period of what is in our non-comp base, if we skew more to existing markets, we are going to see some additional cannibalization. So even though the number went up what we saw is when you look period over period that there are more stores operating in existing markets in the non-comp base than there were this time a year ago. Looking forward, again, it is hard to tell what store of the future will do, what the change in format will do to cannibalization, so I will have to say that is a stay tuned until we see more of the results come in.

Fair enough, and that is helpful, Dan. That makes a lot of sense. Just a couple of housekeeping. On the Sandy benefit that we say this quarter realize that probably spills into the next couple of quarters as people continue to try to rebuild. What is built into the guidance as far as benefit from maybe those seven stores goes, or five stores, that we talked about?

TJ, it is seven stores, and we think 60 basis points to 100 basis points for the full year which would include the first quarter being at 125 basis points to 150 basis points.

Okay. The last one from me on the balance sheet payables metrics as far as days and ratios go, it sounds like that may have been a function of timing in the Chinese New Year, but would you mind just confirming that for me, Dan, or anything else going on there that we ought to know about?

That is correct timing. We felt like we got in front of the inventory build for the spring merchandise season earlier, we were better prepared than ever and that obviously affected the AP balance.

That does it for me, guys. Thanks for taking the questions. Best of luck on continued success this year.

All right. Thank you, TJ.

Thank you for joining us on today's call. We look forward to speaking with you again on our second quarter earnings call to provide an update on our continued progress and executing our multiyear growth strategy and achieving our long term growth objectives.

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