LL Flooring Holdings Inc (LL) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators' second-quarter earnings call. With us today from Lumber Liquidators is Mr. Rob Lynch, President and CEO; Mr. Dan Terrell, CFO; and Ms. Ashleigh McDermott, Director of Financial Reporting. As a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in any whole or in part without permission from the Company.

I would like to now introduce Ms. McDermott. Please go ahead, ma'am.

Thank you, operator. 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 loss for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

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

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

Thank you, Ashleigh, and good morning, everyone. I'm here with Dan Terrell, our CFO, and we are pleased to be speaking with you about our second-quarter results.

Our team, once again, delivered record-breaking results, as we continue to see the implementation of our multi-year strategic initiatives drive cumulative benefits across our business. We continue to reinvest in each of the five components of our industry-leading value proposition to widen the advantage over our competition, and broaden the potential customer base with which it resonates.

We are improving our secret sauce -- not with one ingredient, but with many in combination. We are enhancing the customer experience while we broaden the store base, and we are continuously adding to our core assortment to provide a more complete flooring solution. The results we achieved in the second quarter and year-to-date are a reflection of improving yet sustainable strength across our operations, with each quarter including reinvestment across our entire value proposition for future benefit.

Second-quarter highlights include net sales improved over 22% to $257 million. Comparable store net sales increased 14.9%, completing eight consecutive quarters of net sales increases in comparable stores. Our operating margin expanded 350 basis points to a record 12.9%, and net income grew over 67% to top $20 million, or $0.73 per diluted share.

The strength of our world-class team and our ongoing commitment to not only the execution of our key strategic initiatives, but also continuous improvement in all that we do, is enabling us to generate growth that we believe is sustainable over the long-term. We believe we are strongly positioned to continue achieving top and bottom line increases for the remainder of 2013 and for years to come.

Our unique value proposition continues to reach a greater number of consumers through the expansion of our advertising reach and frequency, targeting not only our core DIY customer, but also the more casual consumer interested in a hard service flooring purchase. We are very pleased with the positive results in traffic and overall demand that we have driven through our increased advertising spends.

As you know, a big event for us in the spring remodeling season is our annual April big sale. This event was highly successful this year, driving sales, but with a reduced impact on our gross margin as compared to prior years. We were also pleased with other promotions throughout the quarter, including our end-of-quarter clearance sale. This promotion, which was planned as part of our 300 store celebration, included discounts across all of our merchandise categories for the first time.

Even as more consumers are coming to know the Lumber Liquidators brand and our offering, the efforts of our merchandising, sourcing and supply chain teams are continuously improving upon our industry-best combination of assortment, quality, pricing and availability. We have made significant strides in the past year, strengthening the direct sourcing relationships we have with our mills around the world, which enables us to offer the highest quality merchandise and the broadest assortment at the lowest prices.

In addition, we have continued to optimize our supply chain, allowing us to make our products even more available to meet customer demand in the most timely and efficient manner. Through our best-people initiatives, we have equipped our sales teams with better techniques for service and selling, improving their ability to educate and ultimately satisfy customer needs.

Last month, we were delighted to welcome Sandy Whitehouse to our leadership team as our Chief Human Resources Officer. Sandy brings extensive experience in Human Resources as well as retail store operations, including more than 20 years with Sears. In addition to the knowledge she brings to this new role, I am also incredibly pleased that Sandy shares our enthusiasm, drive and determination to build on and take our best-people initiatives to the next level.

Again, we believe the continued focus on our value proposition, in combination of these strategic initiatives, will drive increases in net sales and operating margin well into the future. Our entire team is more excited than ever about the opportunities we have in front of us.

Before I turn the call over to Dan, I would just like to reiterate how pleased we are with the strong and consistent performance the team has achieved in the first half of the year. We remain confident that our business is positioned to capture significant share in the fragmented hard surface flooring market.

With that, I would like to pass the call on to Dan. Afterwards, I will return with some closing remarks.

Thanks, Rob. Good morning, everyone. I will provide additional details on our results, and then update our outlook for the remainder of 2013. As Rob noted, our operations are now benefiting from the implementation of a number of key initiatives, working individually and in unison, to capture long-term share in a recovering residential home improvement market in driving operating margin expansion. Though we believe these strategic initiatives will produce benefits which are sustainable for years, our continuing reinvestment in each component of our value proposition will provide even greater opportunity for share gains and operating margin expansion.

Turning now to our results for the second quarter. Our references to percentage and basis point changes are in comparison to the second quarter of 2012, unless otherwise noted. Net sales increased 22.2% to $257.1 million, with a 14.9% increase at comparable stores and record new store productivity. Net sales were driven by a combination of increased traffic, which we measure as a number of customers invoiced, and an increase in our average sale. The 14.9% increase in net sales at comparable stores stacks on a 12.4% increase in the prior year, and was driven by a 9.1% increase in the number of customers invoiced, and a 5.4% increase in the average sale.

As Rob noted, we believe our value proposition is appealing to a larger customer base through greater reach and frequency of our advertising. And we also believe conversion to net sales is more effective due to our sourcing, supply chain, and best-people initiatives. This is supported by strength across the maturity of our store base, including a 14.4% increase in stores operating for three years or more.

Our second-quarter average sale was $1710, up from $1625 in 2012, due to an increase in the average retail price per unit sold, which itself benefited from net increases in the sales mix of premium flooring products, a 220 basis point increase in the sales mix of moldings and accessories, and stronger retail price discipline at the point-of-sale. We believe the store locations serving communities recovering from the effects of Hurricane Sandy raised the increase in comparable store net sales by 65 to 75 basis points.

Store base expansion continues to drive net sales. We were operating 300 stores at the end of June 2013, up 8.3% from the 277 stores at the end of June 2012. We opened seven new stores in the second quarter, bringing the 2013 total to 12, all in our Store of the Future design, featuring an expanded showroom. We have also remodeled eight existing stores to provide the expanded showroom format, including five stores relocated within their primary trade areas. We believe current-year net sales at both comparable and non-comparable stores have benefited from both the larger showroom and improvements in our real estate strategy, including a site selection process emphasizing more retail-oriented areas, and an overall focus on long-term, total market penetration.

Turning to our gross margin, which expanded 400 basis points to 41.3% in the second quarter of 2013, on top of expanding 330 basis points to 37.3% in the second quarter of 2012. Overall, our 2013 gross margin has surpassed our expectations, due to the strength of moldings and accessories, which increased as a percentage of sales mix, and yielded a significantly higher gross margin, due primarily to our sourcing initiatives.; the continued improvement in retail price discipline at the point-of-sale, delivered through strong store management and training initiatives; generally lower-than-expected transportation costs, driven in part by greater supply chain efficiencies, and in-store controls over transfers and customer delivery; and, finally, stronger-than-expected net sales.

In comparison to the second quarter of 2012, the 400 basis points of expansion included the following -- product margin improved 320 basis points, due to a number of initiatives working individually and in combination, including those I mentioned driving a higher average retail price; also, our sourcing initiatives, which continued to lower product costs. Transportation costs improved 60 basis points, due primarily to lower net domestic costs, partially offset by higher international container costs. Our domestic costs benefited from more efficient unit flow from distribution centers to stores; a significant reduction in the number of units transferred between stores; a net reduction in delivery rates from third-party carriers; and generally lower fuel costs.

Though our blended international container rates remained higher in 2013 than 2012, we expect rates to stabilize at current levels, and therefore present a favorable comparison in the second half of the year. All other costs decreased as a percentage of net sales, due to lower cost of inventory reserves, including obsolescence and shrink, partially offset by our increasing commitment to quality and greater demand for flooring samples.

Selling, general and administrative expenses for the quarter increased $14.3 million or 24.4% to $73 million, due primarily to higher net sales and the growth in our store base. As a percentage of net sales, SG&A was 28.4% in the current year, up from 27.9% in 2012, with a 50 basis point increase, due primarily to higher advertising expenses. Advertising increased approximately $4.8 million or 30.5% to represent 8% of net sales, up from 7.5% in the second quarter of 2012. The 8% of net sales matches the first quarter of 2013, a year we entered an aggressive pursuit of market share, driven in part through the broadening of our advertising reach and frequency. Given our results to date, we expect to maintain this course throughout the second half of the year.

Salaries, commissions and benefits increased approximately $5.5 million, and remained at 11.9% of net sales. We levered corporate infrastructure, distribution center operations, and certain benefits by nearly 50 basis points, but offset that benefit with higher expenses due to store base growth, higher commission rates earned by our store management, and larger accruals for management bonuses. All remaining SG&A expenses, including occupancy, depreciation, overhead, and stock-based compensation, increased in aggregate approximately $4 million; as a percentage of net sales, however, remained at 8.5%.

Note that these expenses in 2012 included a one-time charge of $700,000 to fully reserve certain notes receivable. Excluding the prior year reserve, the current year net increase is primarily due to higher bankcard discount rates, as our customers increasingly took advantage of extended-term promotional programs offered under our proprietary credit card.

The effective tax rate was 38.6% in both the second quarter of 2013 and 2012. Net income increased 67.7% to $20.4 million or $0.73 per diluted share, based on approximately 28 million weighted average diluted shares outstanding.

Turning now to our balance sheet and cash flow drivers, cash and cash equivalents increased to $84.7 million at the end of June 2013, up from $64.2 million at the end of 2012, and $31.5 million at June 30, 2012. Merchandise inventories totaled $230.5 million at June 30, 2013, an increase of 11.5% over the year end, and 8.9% over prior year's quarter.

Available inventory per store was 636,000 at June 30, 2013, down from 664,000 at the end of June 2012. The prior-year balance was the quarterly peak for 2012, and generally reflected supplier transition in certain key merchandise categories. In 2013, we expect a peak in available inventory per store in the third quarter, but continue to target a year-end range of 605,000 to 625,000.

Capital expenditures now total $6.8 million for 2013, up only $100,000 from $6.7 million for the first half of 2012. Current-year expenditures were primarily for store-based expansion and remodeling, investment in and maintenance of our technology systems, and investment in our supply chain initiatives. During the quarter, we used $10.3 million of cash to repurchase nearly 126,000 shares of our common stock on the open market, leaving [$36.8 million] yet to be purchased under our authorized lending.

As we look forward to the second half of 2013, we are confident in the opportunity for market share gain, operating margin expansion over the long-term. However, we recognize the potential for periodic volatility from our large-ticket customer who is considering a discretionary purchase. Though our demand was consistently strong through the spring remodeling season, and we have seen no drop-off to date, we recognize that our demand is influenced by a number of complex economic and demographic factors, and those may vary regionally or even locally.

Based on our results to date, and in consideration of these influences, we have updated our outlook for 2013 as follows. We now expect net sales for the full year in the range of $940 million to $963 million, up from the previous range of $913 million to $942 million. We expect a comparable store net sales increase in the high single to low double digits. We believe the store locations impacted by Hurricane Sandy will benefit the total increase in comparable store net sales for the year by approximately 80 to 100 basis points.

We anticipate opening 16 to 20 new store locations in the second half of the year for a total of 28 to 32 in 2013, narrowing our previous range of 25 to 35 new locations. We continue to plan for 20 to 25 of our existing stores to be remodeled with our Store of the Future format either in place or through relocation in the primary trade area. We now believe gross margin will expand between 200 and 230 basis points in comparing the second half of 2013 to the second half of 2012. And we now expect 2013 earnings per diluted share in the range of $2.45 to $2.60, based on a diluted share count of approximately 28 million shares, exclusive of any future impact of our stock repurchase program, up from a previous range of $2.10 to $2.35.

I'll now turn the call back over to Rob for additional remarks.

Thanks, Dan. We are very pleased with our team's performance in the first half of 2013, as we leveraged our value proposition in serving the flooring needs of nearly 300,000 customers. We speak often about the core strengths of our industry-leading value proposition with its unique combination of price, selection, quality, availability, and the expertise of our people. We believe each component is recognized and appreciated by our large and growing customer base.

We have spoken in past quarters about our key strategic initiatives enabling us to enhance our price advantage, broaden our offering, and strengthen the availability of that entire assortment. We have also spoken more recently about our investment in training, to ensure our customers receive expert assistance throughout the purchase cycle.

I'd like to spend a few minutes today on quality, which is fundamentally important to the success of our premium brands and key to a loyal customer base. Sourcing directly from the mill provides the foundation for our entire value proposition. Due to our scale, we often purchase the majority of our mill partners' capacity. And, as a result, we have insight and visibility throughout the sourcing process. This provides a significant competitive advantage compared to the distributor model of many of our competitors.

Our product offering features our high-quality proprietary brands, which represent more than 95% of our net sales, and include the premium brands Virginia Mill Works handscraped hardwoods, Morning Star bamboo, and our flagship Bellawood lines. Our commitment to quality begins with well-designed product specifications, followed by strict adherence to a set of internal standards set well above regulatory requirements. Because of these standards, the products we sell nationally exceed the most stringent requirements of any state.

We have developed quality control and assurance processes for our products that we believe lead our industry. Due to our international sourcing, we have more than 60 professionals around the world, including in the US, Canada, China and South America, who perform and monitor those processes that we believe are most effectively executed on the ground at the mill.

We augment the on-site controls with additional testing in both our own labs and in independent, certified facilities. The combination of our on-site controls and our additional testing is designed to ensure that our process exceed the highest regulatory requirements and meet our more stringent internal quality standards. As national standards are developed around product quality, construction, and packaging, we will engage in and intend to lead our industry in the process.

Before we turn the call over for questions, I would also like to spend a few moments updating you on our new Store of the Future. As many of you know, our 2013 store-based expansion has featured the Store of the Future in its expanded showroom. We are pleased with the results we have seen from the 20 expanded showrooms to date, and we plan to end the year with as many as 57, including up to 32 in new stores.

Our new format stores we have open in 2013 are generally outperforming the net sales trends we have historically expected at new stores. And our new store productivity is at a record high in the second quarter. Further, the aggregate performance of our remodeled stores, whether in place or relocated in the primary trade area, has generally exceeded our expectations.

We recognize that the sample of expanded stores is small, and we have operated the locations during the spring remodeling season. That said, we are certainly encouraged by the results to date, and look forward to additional openings in the second half of the year. Our real estate and store transition teams have done an excellent job implementing the new strategy and minimizing any disruption to existing operations. And we are confident we can ramp up our planned number of expanded showrooms in the second half of the year with continued success.

In June, we reached a milestone with the opening of our 300th store. Our store base is now 250% of what it was at our IPO in November 2007, but only halfway to the 600 domestic stores we are currently targeting. Our improved real estate strategy, combined with our new store format, is proving to be highly successful. And as we experience greater market penetration with less cannibalization, we expect to challenge that target.

As we look forward to the remainder of the year and beyond, we believe we have the right team, structure and strategy in place to continue gaining market share. We continue to be well-positioned to deliver multi-year net sales and operating margin expansion. I would once again like to thank our entire team in the US, Canada and Shanghai for their unified commitment to continuous improvement and dedication to strengthening our value proposition.

Operator, we are now ready for questions.

(Operator Instructions). Matthew Fassler, Goldman Sachs.

Good morning and congratulations on another great quarter here. The first question I want to ask relates to gross margin. Obviously, we're kind of in unchartered territory. If you think about the seasonality of your business, the second quarter has actually often been your lowest margin quarter from a gross margin perspective, I think due to the promotional cadence of the business. And the gross margin has typically ticked up over the remainder of the year. Now some of that of late probably is just because of the continuous improvement that we've seen in the business that's overwhelmed seasonality. But if you look further back, that was the case. Would you expect that to continue to be the case as we move forward?

Matt, this is Dan. You are absolutely correct that the second quarter had usually been the lowest gross margin quarter of the year because of our promotional cadence, leading with the April big sale but also the close of the remodel season.

We were surprised by the strength we saw in the second quarter, most of it coming from the training and disciplines at the store increasing the average retail selling price; the better assortment and our ability to upsell to premium products. And then the transportation cost benefit is actually coming a little earlier than we expected. A little bit of it is rate, but probably most of it is the strength of our people, through the supply chain and at the store, to hold those costs down.

I think those initiatives are going to wash through now, so that the second quarter will not be the pronounced dip that it had been in prior periods. As we measure against the second half of the year, it was a [38.6], I think, in the second half last year, up about 130 basis points from the first half. We now expect roughly about 200 to 230 basis points of expansion on top of that number.

That's 200 -- that second number you gave, the expansion you expect this year, that's year-on-year expansion, correct? Not sequential?

That's right.

All right, second question on the advertising. Clearly, you are putting money to work against the incremental gross profit that you're generating, and advertising was in fact precisely a percent of sales, down to the 100th in the first half of the year. Do you expect to manage it to that number, as you move through the course of the year? Or are you simply saying that, directionally, you're going to continue to advertise -- to commit some of those excess gross profit dollars to marketing?

Hey, Matt, this is Rob. What I would tell you is I think you should see us continue to maintain the pace of reinvestment of advertising to grow sales and take market share. I think we started talking about this about two years ago. And the exciting thing for us as a company is when you look at the opportunity we have for growth, the market share within our core categories, as you peel that back and look at the total number of owner-occupied homes in the US, we see about 75 million homes out there that we penetrate less than 1.5% a year.

So we feel the growth potential for us is enormous. And that the things that we've been doing with the advertising and marketing broadening that reach and frequency, and the teams that have been doing that have been doing a phenomenal job and it's paying off. So, overall, yes, we are delevering. We think it's the right thing to do. It's investing in the value prop, and it's delivering profitable sales growth. So you would look for it to continue.

Got it, thanks a lot. Lots of other questions but I'll let others step in. Thank you.

Joseph Edelstein, Stephens Incorporated.

Thanks for taking my questions. Thanks again for the comments on the Store of the Future at the end of the prepared remarks. I'm curious how much more did the same-store sales of those remodeled stores outperform by the chain average?

Joe, they were improved and we have now seen it for enough months where we felt comfortable putting it in the prepared comments. But remember that it's still a pretty small sample. Even in the second quarter, I think all stores with remodeled showrooms was less than 4% of our sales.

We operated during the remodeling season, always a strong time. So we've got a small sample operating for a short period of time, but we have seen it enough where we're comfortable saying, at least in this shorter-term, they have outperformed our expectations and our historic model.

This is Rob. I will give a little more anecdotal color on that as well. What we're hearing from the field is what's most impressive to me, is that our store associates are loving this story. The customers are adapting to it very well. It's creating a great experience in the store for the customers, and it's creating an easier selling process for our store associates.

And without getting into specific details at the store level, what I would tell you is, we're pleased with it because it's working in the new stores. You can see that in the new store productivity. It's working in the relocated and remodeled stores -- where, if we're moving a store to a better trade area -- into a better site, as well as giving it the new mousetrap. And it's also working in our older stores, where we're staying in place and remodeling that old box, we're seeing really good results there, and we're pleased.

So I would look for it to continue. And as we get -- as Dan says, we get further into it and more data points, we will share some numbers in the future.

Yes, that would be great. Also, curious about the cadence of the planned store growth and remodels really for the rest of the year?

Yes, well, we are going to finish the year, we think, with 28 to 32 new. We have got 12 now. And we still think 20 to 25 total remodel either in place or relocation in the primary trade. And we've got eight of those right now.

But the third quarter should probably have the heavier amount of stores?

You are going to see that ramp up. One of the things -- as we were just trying -- starting this year with the new store format with the Store of the Future, we start -- we slowed the pace down in the first half, to help us get some of the kinks out, and get the infrastructure and resources in place to ramp it up in the back half. So that's why you'll see it's implied in the numbers that, yes, that's basically going to pick up. But we're confident that the team and the infrastructure and the resources that we put in place, and the processes around it, that we will be able to deliver those numbers.

Yes, just don't look for it to be crazy disproportionate to the third quarter. I mean, the third quarter may be a little bit heavier than the fourth, but we're looking at a pace over these next six months.

Okay, that's very helpful. And if I could also ask a question on the per-store inventories. I appreciate the commentary that you gave. And I think even last quarter, you had mentioned that they were trying to get ahead with some pre-buys -- you know, ahead of the Chinese New Year's, some additional supplier transitions. It sounds like you're going to look for a peak in the third quarter of this year. I'm curious to know, are you planning any additional sales, perhaps in the fourth quarter, to help you work down from those 3Q levels?

This is Rob. You know, we look at inventory very strategically. It's key to the value proposition in terms of availability. And really what we have been doing is, if you look back the last couple of years, we feel that the quality of the inventory is probably better than it has been in a very long time. On top of that, part of what you are seeing in the sales benefit here is that -- is us reinvesting in front of some of the trends and new product launches that we've been seeing, the vendor transitions. We -- and then also in terms of a recovering housing and flooring industry.

So we've really invested in front of it. We feel that we have very good control of the inventory, that it's high quality, that we have enough to meet the demand on the events and promotions coming up. But, in general, if you think about the continuous improvement we have been driving across the operations, from supply chain to merchandising to allocation to stores all working together, we actually have a much more efficient and streamlined operational efficiencies today than we've had maybe in the past. So things are working together. We are doing more with less on the inventory.

Again, I would see it to kind of continue the pace. And I see no problem with us falling in line to where we are projecting for the end of the year. I think that means two things. It helps us manage the inventory, but it also gives us what we need to deliver on our sales goals.

Yes, that sounds great, and clearly adding value for the customers. Just last question for me then, it would be -- could you just give us an early read on July trends?

Joe, in my commentary, I wanted to make sure people understood that there are a lot of things that can impact a discretionary purchase, particularly large-ticket. But that so far in July, we haven't seen any drop-off from the trends we saw, which were consistent across the second quarter.

Great, and congrats again on the success.

Peter Keith, Piper Jaffray.

Hi, thanks, and my congratulations as well on the continued success. Rob, I was wondering if you could highlight some of the human capital additions that you made that maybe didn't require a press release? Because, clearly, it sounds like some of the drivers, particularly on the gross margin line, are kicking in sooner than you thought. I'm wondering if that's from the addition of some new people that you might be able to outline for us?

Yes, it's a really good question. We talked a lot about continuous improvement over the last couple of years. And we take that very seriously as a philosophy in how we're running the Company. As you know, to your point at the senior level, my direct reports, we have made some changes and brought in some new folks. But we've also done that across the entire organization, all the way down into each of the functions and merchandising. Bill Slagle has brought in and added resources, and built a world-class team.

As we acquired the China sourcing operations, we added -- we built that out and added resources there. We have done the same thing in almost each and every function in the Company. And really importantly, too, and as we talk about the best-people initiative, all the way down into our stores. Our senior store leaders, our regional managers out there in the organization, we have had some involuntary and voluntary turnover there that's been kind of continuous. And we've been raising the bar.

The same thing down to the store manager ranks, the assistant manager ranks, and then into the hourly ranks. So something we take seriously. Something we have been doing. Absolutely haven't been -- we don't issue a press release each time we do it, but our people are extremely important to us. Every person down to the last can contribute.

The exciting thing is that I think the morale in this Company has never been higher. We are aligned around a common strategy, a powerful value proposition, and a set of strategic initiatives and goals that are all working together to kind of create that secret sauce I talked about in my script. And that's what's exciting. And the team behind it is extremely important. And in my experience in my career in retail, I have never been in a company that it's more important when you understand the dynamics of our business, the high ticket, the low transaction count, the type of the business that we do relative to other types of retailers, it's very, very important. And we will continue to invest in our people and drive our best people-initiatives, which is why we brought -- we have Sandy Whitehouse now in our HR organization that's going to help us with that going forward.

Okay, that's great feedback. I appreciate it. And I guess turning to Dan, a couple of investor questions on the SG&A and, obviously, it was a spectacular quarter. Maybe the SG&A line delevered a little bit more than what some people thought. It looked to be the advertising ticked up similar to Q1, but it was really that salaries and commissions line that didn't get any leverage compared to the last couple of quarters. Did something change in Q2 with the way maybe bonuses are accrued or something like that, that is specific to Q2 or may change things going forward?

There were some timing adjustments in there, Peter, and then there were some planned adjustments. We levered the corporate group, the warehouse and distribution team, and then even some of the benefits we got some leverage, but we did have higher accruals related to our annual management program. The success we've seen in the first half of the year. We pulled more of that accrual into the first half and the second half. We're always challenging the commission rates for the store teams. And obviously, the stores are just doing fabulous work out there as far as capturing demand and converting it to sales. So we're always challenging the commission rates.

We also have some additional stock comp expense that is related to some equity grants that have run through. You've got a little bit of timing related to those accruals. And you've got some of the challenge that we want to keep the momentum going by challenging the rates that we paid, particularly to store teams.

Okay, well, you can't argue against higher accruals for the store teams, with what's going on. One last question. Just given the success of Store of the Future that you're seeing, you are doing 25 remodels/relos this year. Are you thinking about, kind of looking out to next year, how that might pick up, given your, I guess your early results that seem quite favorable?

Yes, Peter, we are. It's 20 to 25 this year. We're still looking at a range, because, obviously, a remodel in place has some difficulty to it that a relocation doesn't. And so we're still looking at how effectively our team can transition that showroom while a store operates. And so far, they have just done great. But it's going to be a challenge looking forward. We believe there's the right location strategy and availability out there to do more relocations, but, again, make sure we've got the right teams in place. Because, obviously, the existing stores are doing well -- 14.4% increase in all stores over three years. So, we want to be very careful about how we accelerate that, but it is something we're looking at going into 2014.

Okay, that's great. And congratulations again.

Dave MacGregor, Longbow Research.

Yes, great quarter, guys. The gross margin, I wonder if we can just talk about that for a moment? Really kind of a great performance, particularly at a time when hardwood prices are inflating at a double-digit rate. So I'm wondering if you could sort of reconcile those trends for us? Are you just sourcing more offshore than domestically? And if there was some hardwood inflation impact on the gross margins, it was just offset by progress on so many other things, could you help us understand the proportions there?

Yes, this is Rob. We've talked in the past about our focus on gross margin expansion. And that it's a comprehensive initiative that, really, you can impact in almost every single function in the Company, maybe outside of legal. And so it's something that we've been working on for a couple of years. I would tell you just strategically, that I continue to see a very long runway in terms of our gross margin potential from here.

In fact, as we speak, we're conducting a line review in China right now in our engineered products. And as I mentioned earlier, it's a combination of many different things working together. We probably got 10 to 15 different, separate initiatives cross-functionally we're working on and driving our gross margins. Obviously, from the sourcing, the line reviews, the assortment mix is driving it.

The marketing and advertising strategies are driving new customers into our stores that have a different price sensitivity to the product pricing, and what they're looking for in terms of the type of quality of the product they're looking for. They're looking for a higher-quality product. They are looking for more help. They want all the attachments to complete the project. So marketing is actually driving that in terms of the traffic and the folks coming into the stores.

And then the stores, like Dan said, our stores are exceeding all of our expectations in the way they are executing and delivering, and meeting the demand that we are sending into the stores. And that's the best-people initiative; that's the field leadership; that's the motivation; that's the training that we conducted at Lumber Liquidators University, in terms of everything they are focusing on from attachments to ASP, you name it.

And I think Dan mentioned in his prepared remarks that moldings and accessories are really driving the margin. And there's three or four things underneath that that's driving it -- from the mix of the accessories to the cost of the accessories, post line reviews we've conducted, to the supply chain efficiencies getting them into the stores and into the customers' hands more effectively and more efficiently, and then the stores better attaching and selling them. All that stuff is working in combination to drive the margin.

And, like I said, we've got a number of things going on. Look for this can to continue. We see a long runway here. And I think the important thing strategically for the Company is, too, this gives us the flexibility to invest back into our value proposition, to drive the benefits in these initiatives, and to take some of that and reinvest back into advertising, to invest back into each point of the value process -- if it's availability, if it's quality, if it's people, you name it, we are going to be doing that very thoughtfully along the way.

Okay, second question. You've been kind of putting up mid-single digit ticket comps here for the last couple of quarters. Is that how we should think about the second half of the year, kind of mid-single digit ticket costs?

Dave, it's got opportunity to continue on this pace. We came into 2013 expecting traffic to be the primary driver of comps; ticket to not be a drag, but not really to be a boost either. And what we have seen is, through the store performance of retail price discipline, and attachment of moldings and accessories as the primary two, we have seen ticket expansion. I think it's available to do for the second half of the year as well, now that we have seen it in the first half.

So if you can continue to comp in a mid-single digit, you are guiding total store comps kind of mid to high single-digit. Help us understand kind of what looks like a fairly negative view on traffic for the second half.

Well, we think if you think about 10% being sort of a midpoint of the second half guidance, you may see 3% to 4% of it in ticket, 6% to 7% in traffic.

Okay, thanks very much, and congrats on all the progress.

Sure, thanks.

Matthew McGinley, ISI Group.

My first question is on the big sale. How much of the 15% increase in comp do you think was driven by the big sale versus what you call the spring remodel season? And as it relates to the gross margin impact from that big sale, if it was more successful in the last year in your promoting product, why would that have had no impact on gross margins? What are you doing differently with promotion that it no longer has an impact on gross margin rates?

Matt, I'll start and let Rob fill in. The big sale is always a big driver in April. The last couple of years, we have changed the focus from invoice sales to orders, converting demand into orders that can be invoiced over a longer period of time. Think back a few years ago, we used to look at that sale as what could you invoice by Sunday afternoon? Which meant the customer had to pick up the product.

Now we have got a focus on just get the customer into the store, take care of them. Sell them what they need. Come back with the moldings and accessories, provide that full ticket. And that's not just for promotional product, that's across the entire spectrum of our assortment. So what we're seeing is that sales have an impact in the quarter. It doesn't drive as much of April, but it drives both April and May.

I will say, again, though, that we saw -- even though that got us off to a good start, we saw a really consistent demand across each month of the quarter, very consistent. So it got us off to a good start, but we were able to maintain it. And the lessening of the impact on gross margin is because we are now featuring the whole assortment, booking the open order, coming back to follow up with moldings and accessories that may round out the ticket. So, the last two years, we've taken that approach. It had a far-reduced impact on gross margin last year and we didn't see any adverse impact in the current year.

Okay. And then on the comment you made on the consistent trend through July, you had a pretty significant surge in customer deposits year-over-year. It was up around 32%. If those were actually converting, why wouldn't you experience acceleration in demand in July?

The customer deposit balance is sort of a reflection of open orders, which can -- which is maybe about two to three weeks of demand. It can vary based on where our inventory levels are aligned to sales; the sales mix that's within those open orders, and the promotional cadence that we've got going on -- which is why we tend to expect that to be an approximation of the sales increase, but never a one-to-one correlation because of some of those factors.

So we were pleased with what we saw, based on the strength of how we came out of June and July. We are certainly invoicing at a normal pace, and we have seen continued strength in both new demand as well as invoice demand.

Okay, thank you very much.

Brad Thomas, KeyBanc Capital Markets.

Thanks, good morning, and let me add my congratulations as well. I want to just follow-up on some of the gross margin opportunities, specifically on the sourcing side. I was hoping, Rob, you could just kind of take a step back and, big picture, give us a sense for kind of what inning you feel like you're in on the sourcing side. And then maybe speak specifically to how much more opportunity is still in front of you in China, and how things are going with the line reviews that have been undertaken in Brazil.

Yes, good question. You know, I just want to reiterate what I said a few minutes ago, that we definitely see more runway in front of us here in terms of the exact inning we are in. The thing you have to understand is, I want to try to put up a level. We have a very strategic and comprehensive program around margin enhancement in terms of driving the margin, and using that as fuel to drive sales, investment value prop, grow our market share. And grow our earnings as well.

So I would tell you that we feel very comfortable. We see a long runway. Specifically to under sourcing, there is many things we are doing in sourcing. The line reviews are one thing we are doing in there. And the line reviews we continue to conduct them. And they continue to add value based on the process and the procedure and the way we train our buyers, and the way we conduct these line reviews, they continue to add value, almost like -- excuse the analogy, but the cow. As you feed and take care of the cow, you get more milk out of the cow. Okay?

So I would look for those to continue. The thing that we are always surprised by is the fact that in each of our line reviews we conduct, we are learning that there is so much capacity out there in the world. And as we have expanded our global presence and are reaching out to other countries, and other potential mills out there, we see new players come in to each line review. And it's as curious and nice competitive process. And it gives us alternative source, diversifies our mill base, and gives us also new and exciting products.

You know, we're looking at -- within Asia, we are looking in assessing mills in several other countries. Same thing in South America; same thing in Europe. So I would just say that that's -- it's really the sourcing team, the world-class team we have, and the work that they are doing to kind of -- to continue to drive it.

And then, as you know, early innings in the supply chain and what's going on there to drive margin enhancement and early innings in the operations, in terms of the stores and the attaching and the mix, the management -- the pricing disciplines that the stores are doing are really exceptional, in terms of their maintaining their pricing disciplines, their attachments. They're upselling when appropriate in terms of what the customer is looking for. All the way down to the execution on lowering our store-to-store deliveries and our store-to-store transfers, and then also customer deliveries, the execution there.

We are charging full amounts for our deliveries. We are not giving it away like sometimes we have done in the past for customer service issues. So there's many things working in unison that's going to drive the margin; it's doing it now and will continue to.

So, thanks, Rob. And if I could just add one more follow-up on the current base of business and the outlook for the second half. Obviously, it sounds like things are still going very well at the start of the third quarter. The comparisons just on a one-year rate are similar to what you were up against the second quarter. They do get a little bit tougher on a two-year stacked rate.

Can you maybe help us think through some of the puts and takes in terms of the comparisons, anything that you're up against? And then on the flipside, any maybe new marketing initiatives or sale events or any new products that may help to accelerate sales in the back half? Just want to try and make sure we put everything into perspective here for the opportunity in the back half of the year.

Well, Brad, working backwards, I don't think we have anything that's a specific new item we will introduce in the second half. It will be more of the same. More of the new store expansion, a little bit greater pace than in the first half this year, but not dramatically increased over the second half last year. We're always challenging the product assortment from what we sell as far as the premium products in the moldings and accessories and attachments.

So no -- nothing new coming there, but more of the same that we have seen in the first half of the year. We are cautious because the second half of 2012 was stronger than the first half. The second half of 2011 was stronger than the first half. You recognize that it's a discretionary purchase. It can be delayed. There are a number of factors that influence it. So we are just trying to take a prudent look at what might come in the second half of this year, and acknowledge that we're a purely discretionary large ticket purchase.

So there's not anything embedded in the number. We are pleased with what we have seen in the first half. We are pleased with what we have seen to date in July, but there is still a second half to go.

Very helpful. Thanks, guys, and keep up the great work.

Laura Champine, Canaccord.

Good morning, and congratulations on the quarter and a great-looking new store out in Vegas.

Okay, thanks, Laura.

The store is -- the new store format is so different and bigger, and I'm just wondering of the -- most of the conversions you have done have been relocations, although I hesitate to characterize them as a group since it's eight stores. But as you move forward, as you look at your entire existing store base, how many of those stores or what percentage of those stores do you think you'll need to relocate, in order to get them into a good-looking Store of the Future?

Hey, Laura, this is Rob. I would tell you if you look back historically at the real estate strategy and the success of the refined (technical difficulty) and strategy we have been implementing the last couple of years, that I would look to a good 20%, 25% to one-third of the stores being relocated. And then, obviously, we're going to remodel in place as well. And it's going to be -- there's a number of things that we're using to kind of filter and screen and decide on whether stores are relocated or not. And there's a lot of rigor and analytics behind that.

But, again, so far so good. We have relocated several. We are pleased. We have -- like I mentioned earlier, we have also remodeled in place a few of our higher volume stores, and we are pleased with what we are seeing there. So in general, we're just excited because the Store of the Future seems to be working in all three areas, either a relo or remodel in place, or in a new store location. And, again, what it's doing for us in terms of a market optimization perspective -- like the market you were in Las Vegas. We relocated the single store that was there to a Store of the Future before we opened up the new store. So that was exciting. And I think we are -- again, we're actually pleased with overall with the market, and how that's performing.

And how much of the -- so there's a greatly expanded tool and accessory assortment in the new format. How much of that expanded tool and accessory assortment are you able to get into your older format stores?

Yes, good question. That's something we are constantly looking at in terms of looking at the bestsellers there and getting them out to the existing stores. And we're actually in the process of doing that right now. We have got another round of resets going out in terms of the tools and accessories going out to all the existing stores from the Store of the Future set.

And, Laura, I would just add, you know that it's hard to pin a single metric down, because our older showrooms can be as small as 700 square feet, 800 square feet, all the way up to, even in the older format, 1100 square feet. So where the older store has got a little additional space to work with, we can look at some racking and put part of that assortment in. Where you are dealing with a 700 square foot showroom, it's incredibly difficult.

And, yes, I would just add to that. I mean, you shouldn't imagine the operational improvement and what it does for the store associates, not for the customers. When you take a store, and you know, particularly an older higher volume store, and you take it from an 800 square foot showroom to the new Store of the Future, the new (technical difficulty) set with the expanded flooring assortment, it's just so much easier for them to sell to customers. It's an easier experience for them.

It's even indirectly -- anecdotally and indirectly helping what we feel on the margin side, I think, because it's a more credible retail format. Customers are less likely to expect a discount or ask for a discount over and above what we are already promoting. So we are seeing a lot of really good benefits from it and we're very pleased.

Thank you.

Gary Balter, Credit Suisse.

Could you talk -- you obviously had a great quarter and you have been answering all the questions about how strong it was in the outlook. Could you talk about what you felt didn't work in the quarter, some of the initiatives, even if it's in the Store of the Future or in other areas, where you're looking at it, saying, hey, this is something we have to re-examine and think about the direction we have to move in? Thank you.

Hey, Gary. This is Rob. You know, what I would tell you is, I think fundamentally, we are very pleased with the overall operation and execution of the team, what the team is doing out there, and with the major initiatives that we are talking about here in terms of the margin, the sourcing, the supply chain optimization projects, the marketing, changes, things we are doing with desk people and what have you.

Really -- what comes to my view, I think there's some -- what I'll tell you, Gary, is there's always some other initiatives we are working on, all the potential areas for improvement and growth, that is probably where that type of focus is, where we are testing and -- testing a new product in the market, or testing a new type of selling procedure in a market. And that's kind of where we focus on our improvement opportunities.

Yes, I'd echo that. It's hard to introduce as many products as we have in the new Store of the Future and have all of them work with equal success. So that's the beauty of having a strong merchandising team, is that they can put something out there and identify the sales trends around it, whether it's off to a slow start or whether it's just one of those things that's not going to perform as well, and then we can reallocate that space.

That's one of the initiatives. As Rob said, we are always -- we have got a lot of irons in the fire and not all of them are going to work. A lot of them revolve around product and how we can continue to augment the ticket, and make it an overall purchase for the customer. And we have seen some success but not all of them will work.

Yes, the biggest complaint I will hear sometimes when I'm out in the stores is, when we have launched a new product that just completely takes off, and maybe we didn't buy enough in, you definitely hear it from the field and from the customers, in terms of why that product becomes constrained, because maybe we didn't buy enough going in. But our merchants have been very, very aggressive and, obviously, that's a good problem to have.

What do you -- on the Store of the Future, what are you taking from that? What are you learning that you could apply back to stores that don't have that format?

Yes, I think Laura hit on that a minute ago, Gary, relative to some of the expanded assortments. And particularly in tools and accessories, what we are learning is, instead of waiting until we've converted a store, we're looking at some of the bestsellers in the new assortments that can be identified and expanded into every store to an accessory assortment.

Same thing with some of the new floors that we may be testing in a -- in the Store of the Future format. So that's one of the things that we are doing, is we're using the Store of the Future as a lab. Where we're going to going to test a new item or a new -- expand in a category, introduce a new item, we're going to do it there first and see how it works, and then take it out to the other store.

Okay, I'll let you go, because we are past 11. Thank you very much.

John Baugh, Stifel.

Congratulations as well, and most of my questions have been answered. But just quickly, on the quality front, as you look forward, I don't know, 12 months, is there any level of expenditure that is meaningful that you think you have to spend to address the quality issue or we won't see anything? Thank you.

You know, good question. The point I would make there is that, as I've said in my prepared statements, quality is an equal part of our value proposition. We have been investing -- just like we have in price, in selection, availability and service. You know, our product specifications are designed to exceed what's out there in terms of any regulatory requirements, John.

We -- I would say -- we are going to invest in quality, just like we invest in any other part of the value prop. Nothing truly compelling right now, but I just, I think, look to us to continue to do what we are doing in terms of our mills comply with our product specs, because we have personnel on the ground in the mills. We have Lumber Liquidators Associates out there. We have invested. We acquired our sourcing office in China. We added to that staff. We will continue to kind of add to that staff as we grow and expand our sourcing base.

And that gives us an advantage. You know we don't rely on a distributor to measure and control our quality. And then we do some things over above and beyond that we are doing now, and we will continue to do that, where we are ensuring that we are meeting our specifications and exceeding industry standards, okay?

We do stringent testing of our products at multiple levels, beyond what's required. Our products are tested by third-party experts, both at the mill and in off-site labs, as I said in my remarks. And we also go in and do random tests at the mill. And then I think the important thing is, we are selling, nationally, products that exceed the most stringent requirements of any state. And that's something that we're going to continue to make sure that we are doing around -- on the forefront of any changes, any national statements that may be coming out, and then we're going to lead the way if there are.

My only other comment, John, would be, it's an equal part of our value proposition, just like we're looking to reinvest in the supply chain to enhance availability, into our people to expand the assortment. You know, the line reviews for price quality is a part of the value proposition, equal to the others. And we will always look to reinvest in the advantage that we believe we already have, and try to increase that advantage.

Great. And then just on gross margin, quickly, is it right -- you have been very specific with guidance and that's very helpful. Is it right to think about that you will see some level of wood inflation going forward, but it will be way more than offset with all these other initiatives? Or are you really not seeing much wood inflation at all? Thank you.

John, we are not seeing much. There has been some well-publicized domestic wood increases, but again, nature of our relationships with the mills can mitigate that. And, then, with what Rob has talked about a couple of times, there is just so many initiatives that are now combined and working in unison together that, even if there is some feeling of pressure, it's going to be well-washed through by the other initiatives in gross margin.

Great, thank you. Good luck.

Thanks.

Our last question comes from David Magee with SunTrust. Please proceed with your question.

Thank you. In under the wire here. Congrats on a good quarter. I wanted to ask you about the pricing in the store. I know you all invest in price and are very conscious of increasing share by having a pricing differential. It seems like some of your competitors might be raising price a bit because of vendor inflation. Is there an opportunity for you all to maybe tweak up a bit on sort of same item pricing and still keep that differential in the future?

David, I would tell you a couple of things there, that our ASP increase did not come from raising prices on like kind product. It generally comes from the mix of the product, and the attachment of moldings and accessories.

And I will one last time tip the cap to the incredible merchandising team and the store team, and the level of communication that we have got here. When Rob talked about the momentum and the enthusiasm, we have a very open line of communication from store floor to the merchandising team, and through to the distribution and supply chain teams. So we can react appropriately when we see whether a competitor has moved their prices and we need to move accordingly, or we need to widen or keep our advantage. So there may be opportunity looking forward, but I think the thing to take away longer-term is, there are open lines of communication, and we are very dynamic and flexible, and can react very quickly to what we see happening within retail prices.

Thank you. Then and secondly, with regard to the traffic increase in the quarter, which was very impressive, any way to sort of parse out how much of that was sort of sector-driven versus the improvements you have made to marketing?

Really hard, as you might imagine, or as you indicated. So we don't have a good metric to provide you. What we can say is, we have got low market share. We are definitely seeing a firming in the housing market. We still believe we are not seeing a full-scale recovery or tsunami of pent-up demand come yet. But we have got low share. We believe we can penetrate a customer base that we previously hadn't been looking at by broadening the reach and frequency of the advertising.

So while we can't provide a specific metric on what's macro versus what's our own initiative, we're pretty excited with what we have seen come from broadening the reach and frequency. And perhaps the macro has added a little bit to that. But we believe we haven't fully maximized that and there's more to come.

Great. Thanks, Dan. Good luck.

Thanks, David.

There are no further questions. I would like to turn the call back over to Mr. Lynch for closing comments.

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

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