LL Flooring Holdings Inc (LL) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators first-quarter earnings call.

With us today from Lumber Liquidators is Mr. Rob Lynch, President and CEO; and Mr. Dan Terrell, CFO.

As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company.

I would now like to introduce Ms. Ashleigh McDermott, Director of Financial Reporting for the Company.

Please go ahead.

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 securities laws for forward-looking statements. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the future operating financial performance of Lumber Liquidators.

Such forward-looking statements are subject to significant risks and uncertainties.

Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable based upon currently available information, 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.

Rob?

Thank you Ashleigh.

Good morning everyone.

I'm here with Dan Terrell, our CFO. And we appreciate you joining us today for a discussion of our First-Quarter 2014 Results and an update on our outlook for the year, as well is as the progress we continue to make on our strategic priorities.

Our first quarter results fell short of our expectations, as harsh winter weather adversely impacted our net sales across a significant portion of our national footprint. While weather is rarely a quarter-long factor for a large portion of our stores, the severity and geographic scale and duration of this year's winter weather was unusual and uniquely frustrating for our entire team.

However, I also believe that the initiatives we have implemented over the last three years have our stores and supporting operations prepared to fully capture available customer demand. As a result, our outlook for the full year remains intact; and we have reiterated our net sales and EPS guidance for 2014.

In the first quarter, net sales increased 6.9% to $246.3 million, a decrease slightly at comparable stores. Gross margin expanded 70 basis points to 41.1%, while operating margin was 9.1%. Net income decreased to $13.7 million, resulting in diluted EPS of $0.49.

Over the first quarter of 2014 and into April, I have traveled to a large number of our markets, both weather-impacted and non-impacted, to work directly with our store leadership in assessing the state of consumer demands and overall market characteristics, including competition and our opportunity to capture additional share. From this first-hand experience and through our analysis of traffic and sales trends, we are recovering that customer demand, which is varying by market as the weather generally relents.

Overall, we believe the customer purchase cycle was adversely impacted in as many as 135 stores, or 41% of our store base. In those impacted stores, net sales decreased nearly 4% in total and over 13% at comparable stores.

In all other stores, net sales increased 14.6%, driven by comparable stores, which increased 8.5%. We also saw encouraging trends as weather in those parts of the country became more seasonal in mid-March.

For the period March 15 through April 15, our total customer orders increased over 20%. And as many of you are aware, our trends in open orders are usually followed by similar trends in our net sales. Though these trends are encouraging, as a reminder, our customer often follows a long purchase cycle, given their need to research and become familiar with the product.

We believe a number of customers may have suspended an entire range of discretionary purchases during the first quarter, which require reprioritization when the weather improves. As a result, while we anticipate a recovery, we expect it may be uneven, differ by market, and continue through the third quarter before demand normalizes.

As most of you know, we hold our annual April sale in the latter half of the month. This year's event was a week later than in 2013 due to the shift in Easter. I am pleased with our team's execution during the sale, and as the weather in more markets has begun to turn more seasonal and recovery progresses.

Despite the weather issues, we continued to implement our multi-year initiatives to further strengthen both our value proposition and our operations. We remain very pleased with the results we are seeing from our re-engineered real estate strategy and our new showroom format.

We continue to roll out new showroom to new and existing markets and ramp-up related resources for scale. We have opened 20 new stores this year, and 31 stores in the last seven months. Though not immune from the impact to customer traffic, the successful opening of this record number of stores, despite difficult weather, demonstrates our team's ability to meet the needs of a faster pace of expansion.

We also successfully opened our West Coast distribution center in the first quarter. This facility, which began receiving merchandise late last year, is now the primary distribution center for over 90 of our Western stores.

To facilitate full operation of this center, we implemented a new forecasting and replenishment system. We expect the increased effectiveness from product allocation and the shortened transit time from warehouse to store to drive operating market expansion as early as the third quarter.

I spoke last quarter about our strategic initiatives taking hold and becoming integrated into the Lumber Liquidators' DNA. I believe this was evident in how our team worked to address the challenges we experienced in the first quarter.

We dug even deeper into our performance, pushing ourselves to examine every aspect of the business and identify additional areas for improvement.

With that, I would like to turn the call over to Dan for a more detailed review of our financial results. Afterwards, I will return with some closing remarks.

Dan?

Thank you, Rob.

Good morning, everyone.

I will provide details on the results for our first quarter 2014 and update our outlook for 2014. My references to percentage and basis point changes are in comparison to the first quarter of 2013, unless otherwise noted.

Our first quarter results were indeed frustrating for our entire team. As Rob noted, we believe up to 135 of our 331 stores were significantly impacted by unusually severe winter weather in the first quarter. I will provide details on our total net sales, followed by a breakout for those stores significantly impacted by weather.

Very few regions were immune from the harsh winter. But our segregation focused on those stores where we believe the adverse impact on net sales was significant.

While conditions generally moderated in mid-March, some areas have experienced unseasonable weather well into April. We now believe a number of our customers were not only prevented from completing their flooring purchase due to the weather, but appear to have suspended a range of discretionary purchases. We believe those projects have been, or are being, reprioritized based on need or season and that the majority are delayed rather than lost.

Our net sales were $246.3 million, an increase of $15.9 million, or 6.9%, with an increase in non-comparable stores of $17.3 million, and a decrease in comparable stores of $1.4 million. Our non-comparable store net sales benefited from our store-based expansion program, with 43 stores opened since the beginning of 2013, all in the expanded showroom format we have referred to as Store Of The Future.

In the first quarter of the current year, we opened 13 new stores, up from only 5 new stores in the first quarter of 2013.

Though not immune from the adverse impact of weather, we remain pleased with the results from the stores operating in our expanded showroom format. And we have continued the remodeling of existing stores.

In the first quarter, we've remodeled 5 existing locations, bringing our total since the beginning of 2013 to 27 remodeled locations. Together with the 43 new locations, we have 70 stores, or 21% of our total at March 31, operating in our expanded showroom format.

Turning to comparable stores.

Net sales in the first quarter decreased 60 basis points, as a higher average sale was fully offset by a decrease in the number of customers invoiced. Our average sale across all stores increased 2.6%, to approximately $1,665, primarily benefiting from changes in the sales mix, including increases in moldings and accessories. Across all of our comparable stores, the total number of customers invoiced decreased 3.6%.

We believe approximately 41% of our stores were adversely impacted by weather in the first quarter. And these stores produced net sales of $93.6 million, a decrease of 3.8% from the net sales at those same stores in the first quarter of 2013.

At comparable stores within the weather-impacted group, net sales decreased 13.1%. As expected, we saw a sharp decrease in the number of customers invoiced at these stores.

But we also saw a decrease in the average sale to under $1,600. We believe a large percentage of customers with significant projects delayed their plans until the weather moderated and discretionary purchases were reprioritized.

The seven stores serving communities recovering from the effects of Hurricane Sandy in 2013 are included with the stores adversely impacted by weather in 2014. We estimate net sales at these locations reduced total comparable store net sales by 90 to 110 basis points in comparing the first quarters of 2014 and 2013.

At all other stores, our net sales were $152.7 million, an increase of 14.6% over the net sales for that same group in the first quarter of 2013. At comparable stores within that group, net sales increased 8.5%, driven by both a higher average sale and an increase in the number of customers invoiced.

As Rob discussed, we expect that we may experience uneven recovery in customer demand market by market through the second and third quarters before normalization in the fourth quarter.

As weather began moderating in mid-March, we were pleased to see customer demand strengthening across all stores. For the period from March 15 to April 15, we saw customer orders increase 21.8%. Those stores we segregated as weather-impacted continued to lag the All Other stores.

Customer orders at weather-impacted stores increased 17.6% over this period, but increased 25.4% at all other stores. We chose March 15 as a tracking date, marking an inflection in both weather and customer demand. In addition, our promotional cadence over the last two weeks of March 2014 was the same as it was in 2013.

We chose April 15 as it represented the last comparable period before results would be significantly impacted by our April sale. That event, which began April 18 in 2013 and a week later in 2014 due to Easter, drives invoice sales during the five-day event. But the greatest benefit is building customer orders, which are historically invoiced over the three to five weeks following the sale.

As Rob indicated, we were generally pleased with the results from the recently-completed event, with invoice sales up over 16%. But those stores designated as weather-impacted again trailed results at all other stores. We believe this is further evidence the recovery in these weather-impacted areas may extend through the third quarter, due to our long purchase cycle.

Turning now to our gross margin which expanded 70 basis points to 41.1% in the first quarter. As most of you know, we segregate our gross margin drivers into those associated with our product margin, including our sales mix; those associated with transportation of our product; and all other costs.

Within product margin, gross margin benefited by 50 basis points, as sourcing initiatives continued to lower net product cost and sales mix shifts favored high-margin categories, including premium products and moldings accessories. Our sales mix of moldings accessories was 18.3% of net sales in the first quarter, up from 17.6% in the prior year.

Greater attachment of LL-provided installation services drove gross profit, but these services tend to have lower-than-average gross margins.

Transportation costs increased 10 basis points as a percentage of net sales, as the benefits of generally lower international container rates were fully offset by higher domestic transportation costs and lower net sales. As most of you know, domestic transportation charges are generally included in our cost of sales as incurred.

Inbound international costs are generally capitalized into the unit cost of product. Average unit costs per domestic mile in the first quarter of 2014 were higher than those in the first quarter of 2013, primarily due to third-party carrier rates, which were generally higher due to the severe winter weather, partially offset by lower fuel costs.

In addition, we incurred domestic transportation costs of approximately $0.5 million as we positioned inventory for full implementation of our West Coast facility late in the quarter.

Finally, gross margin was adversely impacted by an increase in customers choosing delivery services, where we pass along our cost plus a single digit mark-up for administration. In the first quarter of 2014, approximately 17% of our customers chose our delivery services, up from 10% in the first quarter 2013. We believe our attachment of delivery services will continue to increase as we attract more casual customers.

Gross margin benefited 30 basis points within the other cost categories, due to certain operating efficiencies, including a reduction in shrink, partially offset by lower net sales and our increased investment in quality control and assurance. Also, in the first quarter of 2013, certain reserves for merchandise obsolescence were increased due primarily to supplier transition following certain line reviews.

SG&A expenses for the quarter increased $11.3 million, or 16.7%, to $78.9 million. And as a percentage of net sales, increased to 32% from 29.3% in the prior year.

Salaries, commissions, and benefits increased approximately $2.1 million, and as a percentage of net sales increased 10 basis points to 12.5%.

Overall, increases due to store-based growth and our new distribution center were only partially offset by lower store commissions, lower management bonus accruals, and leverage of our corporate infrastructure.

Advertising expenses increased approximately $2.6 million as we continue to aggressively broaden our reach and frequency. As a percentage of net sales, advertising increased 60 basis points, to 8.6%, as the impact of lower net sales was only partially offset by leverage of our national spend.

Occupancy expenses increased $2.6 million. And as a percentage of net sales increased 80 basis points to 4.3%, including store-based expansion adding up to 50 basis points. The incremental occupancy costs of our new distribution facility adding 20 basis points, and incremental cost related to severe weather adding 10 basis points.

Depreciation increased approximately 20 basis points, due primarily to store-base expansion and our program to remodel existing locations to our expanded showroom format.

All remaining SG&A expenses, including stock-based compensation, grew by approximately $3.3 million. And as a percentage of net sales by approximately 100 basis points. Included in this increase were legal and professional fees rising approximately $1.7 million, as well as higher cost per store base expansion.

Operating margin was 9.1% in the first quarter, down from 11% in the first quarter of 2013. The effective tax rate was 38.7% and 38.4% in the first quarter of 2014 and 2013, respectively.

Net income decreased 13.2%, to $13.7 million, or $0.49 per diluted share, based on approximately 27.8 million weighted average diluted shares outstanding.

Turning to our financial position.

Liquidity and capital resources, our cash equivalents, increased to $76.1 million at the end of the first quarter, compared to $72.7 million at the end of March 2013 and $80.6 million at the end of December.

Available inventory per store was $680,000 at the end of the first quarter, up from $615,000 at March 31, 2013, due to an earlier build for the spring remodeling season; increased safety stock in anticipation of our West Coast facility becoming fully operational; and weaker-than-expected net sales.

We are still targeting available inventory per store to end the year between $580,000 and $620,000, with variations based on seasonal demand and product availability.

Capital expenditures totaled approximately $14.4 million for the first quarter, up from $2.6 million in 2013, primarily due to our continuing store base expansion; the remodeling of existing stores; and $3.7 million for property and equipment related to our new distribution centers.

During the quarter, we've repurchased 168,000 shares of our common stock, using $16.7 million of cash. We were authorized to purchase an additional $50.2 million at quarter end.

Turning now to our outlook for full year 2014.

We continue to expect net sales for the full year in the range of $1.15 billion to $1.2 billion. With 20 stores opened through the start of our April sale, we have narrowed our range of new locations for the year to 35 to 40.

We now expect greater net sales from these locations to offset slightly lower net sales at comparable stores. We now expect comparable store net sales to increase in the mid to high single digits, based on our store opening cadence for the remainder of the year.

We will continue our remodeling program, but now expect 25 to 30 comparable stores to be remodeled, either in place or relocated within the primary trade area.

We continue to expect operating margin expansion in the range of 13% to 13.8%, resulting in 2014 earnings per diluted share in the range of $3.25 to $3.60, based on a diluted share count of approximately 27.9 million shares, exclusive of any future impact of our stock repurchase program.

We continue to expect our operating margin expansion to be driven by gross margin expansion, partially offset by SG&A expenses that increase as a percentage of net sales compared to 2013.

We expect to see our West Coast distribution center to increase quarterly SG&A expenses by approximately $1.8 million. We expect incremental legal and professional fees of up to $1.5 million over the remaining nine months.

And we expect capital expenditures between $80 million and $90 million, including up to $50 million for supply chain investments.

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

Thanks, Dan.

Over the past three years, we have remained committed to driving continuous improvement in all that we do through our multi-year strategic initiatives. We have expanded operating margin and continuously reinvested back into our value proposition of price, selection, quality, availability, and people. ¶

Rest assured, we will continue our efforts of driving growth and operating margin expansion for the remainder of 2014 and in the years that follow.

We have come a long way over the last three years. But our future potential to profitably grow our business and expand market share is significant, and we are as excited as ever.

To enable that growth, our investments into our core business this year will be the largest in our history and will continue to significantly enhance our value proposition.

By year end, we expect to have launched or expended cash to better deliver our value proposition to a broader segment of customers; opened two new distribution facilities; relaunched our flagship Bellawood brand; and taken steps to gain greater control of our production from exploring vertical integration to expanding our finishing capabilities.

We also expect to end the year with up to 358 store locations, one-third of which will be operating in our expanded showroom format.

We are focusing 2014 efforts in four key areas: market share, people, product availability, and product assortment.

First, market share. We remain on the offensive to increase awareness of our value proposition within the large demographic of customers who do not consider themselves DIY.

These customers require a broader reach and greater frequency of our marketing, stores located in retail corridors within the market, and a well-trained sales force. In addition, these customers often utilize a range of non-merchandise services from delivery to installation.

We believe we have gained share over the last several years, and will continue to do so through ongoing investment in our advertising, combined with our store base expansion and store remodeling programs.

We are emphasizing efforts to build and further solidify long-term relationships with our customers. While limited to a small group of stores, we believe our greater control over installation services will forge stronger relationships with customers.

We are pleased with our progress in this initiative, which aligns well with our value proposition and enables us to offer our customers a true one-stop shop for their complete flooring purchase. We can now serve our customers through the entire purchase cycle, from the flooring product to moldings, tools, accessories, all the way to Lumber Liquidators' delivery and installation services.

We have also recently opened three concept test stores introducing new product content to our hard-surface flooring offering. We call these stores LL Tile.

Similar to our installation services, we are testing our ability to leverage our core value proposition into adjacent and potentially complementary businesses. This initiative is still at an early stage,; and as we learn, we will share our findings with you on future calls.

Our people remain essential in driving strong performance. And investing in our talent continues to be a critical ingredient to our strategy.

We held our second annual Lumber Liquidators University in March, once again bringing together our corporate and field leadership to reinforce our teams' objectives for the year, along with our unified long-term vision. This year we also focused on enhanced selling techniques that lend themselves to building long-lasting relationships with customers.

We also restructured our store management in January to produce three geographic zones, each led by a Vice President of Sales. Throughout the quarter, these executives further strengthened our team by challenging regional and store-level management.

We feel strongly that our people, particularly our store management, have the greatest influence on our success. We are combining the experience of long-term managers with new team members' fresh insights into our business.

As I previously mentioned, during the first quarter, we successfully opened our West Coast distribution facility. And the teams in our Western US stores couldn't be more excited.

The consolidation of our existing East Coast distribution facilities into a single larger location continues to progress. And we are on plan to be fully operational late in the fourth quarter of this year.

We remain confident that these two distribution facilities will benefit both our value proposition, specifically the availability of product, and our operating margin by reducing lead times and improving service levels to our customers.

In previous calls, we have discussed efforts to further widen our advantage with regards to product quality, particularly international quality control and assurance. We will continue to invest in the best facilities, people, and processes throughout 2014.

One of our most exciting initiatives this year is our Bellawood relaunch. This includes the introduction of our Bellawood 2.0 finish, which further enhances our already industry-leading finish with improved scratch and stain resistance across the entire line. ¶ In addition, we have added a full line of Bellawood stains and low-gloss matte finishes. We look forward to the sales opportunity from these enhancements to our core Bellawood assortment as the transition and reset is now complete across all stores.

In support of Bellawood and potentially all of our domestic offerings, we will invest in more than doubling our finishing capacity. And we are exploring ways to vertically integrate our domestic sourcing from greenwood to finished goods.

We believe our additional control over the raw material, drawing process, and milling will provide greater stability and supply, diversity of assortment, and quality in the finished product, all of which we believe have the potential to drive future gross margin and expansion.

In closing, our value position is as strong and as relevant as ever. We remain focused on reinvestment in that value proposition, continuous improvement across our operations, and execution of our strategic initiatives.

We remain confident that our business is well-positioned to continue capturing significant share in the fragmented flooring market. We believe the continued focus on strengthening our value proposition, in combination with the ongoing execution of our multi-year strategic initiatives, will ultimately drive net sales growth and operating margin expansion for years to come.

I have said this before, and it still remains true. Our entire team is more excited than ever about the opportunities that lie ahead. ¶

With that, Operator, we are now ready for questions.

(Operator Instructions)

Brad Thomas with KeyBanc Capital Markets.

My first question was just going to be about guidance, and stepping back and thinking about it at a high level. You are reiterating the full-year guidance. It's a pretty wide range of about $0.35.

Your first quarter came in, obviously, light. There could be some sales ramifications, as you said, in 2Q and 3Q, before you win this business back. Could you just help us think about your confidence level of low versus the middle versus the high end of the guidance?

Brad, this is Rob. I'll start and I will kick it to Dan.

I think the thing that I would point to mostly, as I mentioned in my prepared comments, that we are very in tune to what's going on out there. I personally have been out there in multiple stores across the country, up and down the east coast, midwest, California.

As we shared in our Q, and also in our comments, we absolutely can determine and segregate where the miss came from in the sales between the impacted stores versus the non-impacted stores. We have confidence -- we absolutely have confidence in the balance of the year in what we are seeing market by market as they recover, in the strong comps in the markets that were not as much impacted, and where they are trending now, as well as all of the business drivers and demand characteristics underneath that we are constantly looking at by store and across the Company.

Yes, Brad. Since we handle Rob's travel, I would say it's as many as 40 stores in four months. He has definitely been out front. We've got a management structure that we believe is going to work better in 2014 and for years beyond. Working with that team, polling that team, staying in constant communication with that group, Rob being on the front lines, we feel like we've got a pretty good handle on what we are seeing take place across the country.

We believe none of our stores were immune from the adverse weather. We are seeing pick up in demand. We like what we are seeing from our new store openings. We are ahead of schedule, as far as months of operation, as well as count, with 20 stores opened leading into our big sale.

When we evaluated the top line, we believe the range that we had was still an appropriate range. When we look at the structure underneath, between margin and SG&A, we still felt comfortable coming to the $3.25 to $3.60, even with the light Q1.

Okay, great. Then, if I could just add one follow-up on the gross margin: First of all, can you just help us think through what maybe weather impacts there may have been on the gross margin specifically in the quarter? I know it may have impacted transportation costs a little bit.

Secondly, just the impact of the new west coast DC -- what that might have been on gross margin in the first quarter, and how you are thinking about that -- the puts and takes on that as a contributor as we move forward through the year.

Brad, maybe I will start, and then kick it back over to Rob.

Working back, the west coast DC, we think, had about $0.5 million of additional costs in there, as we positioned product from east coast to west coast, and prepared for its opening in late March. Opening went well. Pleased with the results that it's delivering so far. But it was a drag on gross margin in Q1. Probably a wash in Q2, but it's going to provide some gross margin benefit in the second half of the year.

The light sales -- again, I touched on it on my prepared remarks. We incur that cost of sale as the product moves. So, store inventory levels that may have been anticipating a higher sales number are probably heavier than we would have expected, which means we've already incurred that cost to ship to store. So, the weather had that impact. It also had an impact on domestic transportation, in that the number of trucks available to deliver domestically were under pressure, and that drove the rates up.

Within the sales mix, there's always a question of what your sales mix would have been had the revenue been higher. We certainly saw that in the northeast and in the midwest areas, weather was severe. In those areas, they tend to have higher average retail price points, but lower than average gross margin, as they focus on solid and engineered hardwoods. So, from a product standpoint -- sales mix standpoint -- there's probably not an adverse occurrence to weather, but that had an impact on operating margin.

Great. Thank you very much.

Rick Nelson with Stephens.

Rob or Dan, if you could provide a bit more color on the comp for the second half of March and into April, and what your guidance would assume for the remainder of the year?

The guidance for the remainder of the year is going to be mid- to high-single digit. Again, we are expecting a little bit less out of those stores, as we're going to remodel up to five less of the comp stores. The recovery within some of the weather-impacted ranges will be slower. We do think that there is additional benefit coming from the non-comp stores -- the newer stores -- where we are ahead of schedule.

In that stub period, we did cite customer orders, as they are sort of the first to turn. They had pretty significant increase, March 15, where the weather began to moderate, all the way through April 15.

The comp-store sales will follow that path under a normalized promotional cadence. As I indicated, the promotional cadence through the end of March was the same we followed in the previous year. The April sale began a week later in 2014, which made the periods a little bit difficult to compare.

All said, I think we called out 21.8% in new orders. I think that the invoice sales were somewhere in the mid-teens. So, they are following behind, but at a slower pace.

What is the lag typically between the customer order and the booked sale?

In a normal environment, it can be 20 to 30 days. When we do something like the April sale, and I tried to bring that out in my prepared comments, that's a driver of invoice. But you have this huge build in customer orders, and that takes up to five weeks to invoice out, which makes it difficult to look at April as a month because, not only was the sale earlier, there was an additional week of invoicing that build in customer orders that we didn't have this year.

Our sale this year ended on Monday, so there's been very little time to actually invoice that open order build. But 20 to 30 days in a normal time frame, and as much as five weeks after the April sale.

Okay, that's good. Thank you. If you could comment on the remodeled stores -- how they are performing -- maybe looking at the non-weather-affected markets -- how they are doing versus the legacy stores?

The two that weren't impacted (laughter) -- we are still pleased with what we are seeing. The stores are in -- when we relocate within the primary trade, we tend to find a more retail-centric corridor. It's got the full assortment. So, we are seeing more casual customers, greater attachment of services, greater attachment of moldings and accessories.

This is Rob. I would tell you, generally, we are absolutely still pleased. The weather creates some cloud in the numbers, obviously, because all the remodeled stores are being impacted as well. But overall, versus the prior -- especially in the stores that we are relocating, they are doing extremely well.

The ones that we are remodeling in place, where we were able to add additional space to them and remodel -- give them that new showroom -- it's absolutely a home run for our stores and for our customers. As Dan said, the attachment rates, the margin, the sales, the labor productivity is all exactly what we expect. So, we are going to continue to remodel and relocate all of our stores over time.

Okay. Finally, if I could ask you about the task of the tile stores -- if you could provide some color as to your plans there? And what these stores might look like, and the long-term opportunity.

Sure. The first thing I want to say is that this is absolutely a test. We are in three stores. And as I talked about in my comments, this is something that we are looking at.

As we've expanded our advertising reach and frequency, and we've been talking to so many more customers, particularly these casual customers, we are pleased with how they're responding to all of our offerings. Dan mentioned how the big -- significant increase in delivery. We talked about the installation and services test. So, this tile test is very similar. It's an adjacent and potentially complementary category in hard surface flooring that we are testing to see how our customers respond to.

We are doing a very thoughtful test across three different stores, and each of the stores have a different operating model. One where we've done a combined showroom, where the tile is in with our solid hardwood floors. It's more of like a store within a store. And then the other two stores, we are testing adjacent side by side to each other, where the stores are separate. To the customer, one of them, you can walk between the stores; one of them you have to -- you can only enter through -- it's a one store at a time.

But the back-end operations -- we are leveraging and we're combining in those stores, as well. It's a fun thing to test. We will keep you posted over time as we get the model open and as we see how they perform.

Thanks very much, and good luck.

Aram Rubinson with Wolfe Research.

Two things: One, can you talk a little bit about input pricing, particularly on the hardwood side? And whether or not you are seeing inflation on the North America source product, or if you are seeing any inflation there, like other competitors are? And maybe what you are seeing on the import side there? Then, I had a follow-up. Thanks.

Aram, we are not seeing a material portion. I think we've said that -- like others, that it's been under pressure, domestic pricing, for some time. The nature of our relationship with the mills tends to offset a great portion of that. But definitely, as we explore vertical integration options that may lie out there for us, part of it is to make sure that we've got a stable supply of product, both the product itself and the pricing for that product.

Internationally -- really haven't seen dramatic inflation there. I'm just thinking the cost of the product, no. There's always some concern for labor pressures in China, but nothing that we've really seen come through in our numbers.

So, some on the domestic front. It seems to be less, and somewhat longer than expected; not much on the international front.

Okay. Yes, because some other competitors seem to be bellyaching about it quite a bit stronger than you are, so I wanted to ask around that.

Yes, we've talked about that. Aram, we've talked about that on other calls. To Dan's point, [only] seeing some of it on the domestic side here. Again, I think relative to the way we source, the direct relationships we have with our mills, and the majority of the business that we have with them, we're able to better control those. And we do handle them on a case-by-case basis. I think the real key thing for us is that direct to mill relationship, and the significant part of their business that we have with them, helps us to mitigate those.

The second question is around delivery. I notice from your Q that you said only one in six customers takes delivery. Does that mean the remainder -- the other five -- take in-store pickup? Or are there other means with which they also take delivery?

I'm just trying to understand how strong the customer's preference is to pick up in store. And if you can convince them to take more delivery over time? I'm just wondering what your preference is. Thanks.

It's surprising: Many of our customers absolutely pick up in store and take with. Oftentimes, the installers will help. They will deliver for them.

But like Dan mentioned in his comments, we are seeing -- we think this has to do, really, with the advertising, where we are really going after more aggressively extending our reach to the casual consumer. These customers are looking for more of these services. They're looking for installation. They're looking for delivery. They want that part of the value proposition.

We like that. We think it resonates very nicely with our overall value proposition. The better we are able to serve them, and provide more of a one-stop shop and a full service to getting that floor delivered to them and installed into their home, then we are creating a stronger relationship with that customer, and that's exactly what we want to do. That's where our value proposition really plays the best.

So, your preference is to move more towards delivery over time?

Absolutely, yes.

Okay. Thank you very much.

Dan Binder with Jefferies.

Just had a question on some of the trends you talked about during that March 15 to April 15 period. You talked about orders. Is it fair to assume that ticket is coming back stronger, too? Or that we should expect it to look better than what we saw in the Q1 period?

Dan, it will definitely -- those weather-impacted stores dropped to a really low ticket. If we did $1,665, those weather-impacted stores dropped under $1,600, which mathematically will tell you: The non-weather-impacted were at $1,700 or above.

We really believe that's a factor of: People who had completed large projects in the fourth quarter waited to begin new large projects until the weather moderated. So, as we see demand recover, we expect the ticket to equally recover in those weather-impacted areas, which will bring the total ticket back up as well.

Again, as we look market by market, we are seeing that in the regions -- in the markets that have been recovering sooner than the other ones that are still dragging.

If orders are a good proxy for future comps, and there's a 20- or 30-day lag, what you are seeing in the Business more recently would suggest that you get this ramp-up, if you include a ticket on top of that, into the double digits again. Am I thinking about that correctly?

You are. The April sale kind of interjected itself right in the middle, and we saw a decent performance during that. But, yes, if we see in the mid-teens, we can expect somewhere in the mid- to high-single digits for comp, if not closer to the low-double digit, and then the rest of it in the non-comp bucket.

Okay. (multiple speakers) I'm sorry, what were you going to say, Rob?

I was going to say: It's just the timing of that. I would tell you that, as we look at it closely, and as we break it down internally, and look at it market by market, it's really just the timing that we are seeing. Because the purchase -- like we mentioned in our prepared comments, our purchase cycle for the customers is typically 100 days from start to finish. So, when that was -- in some markets, when that was disrupted as much as it was, as we all know from the weather, it takes time for that to get reprioritized, to get back in the system, for the customers to come in, get their samples, and initiate that process. That's kind of what we are seeing, and that's what we're waiting for.

Then my second question was regarding the remodel activity. What was -- it sounds like you are seeing good results. So, what drove the decision to do fewer rather than more?

We focused -- you think about what the real estate team -- and my hat's off to the real estate team and the number of locations they address in the first quarter in a really difficult weather environment. We've always talked about: We'll look at the number where it makes most sense; that we'd look at the number of showrooms, and then consider new versus remodel.

We really, based on where we are and what we are seeing, we think we are going to be towards the higher end of our new location number. But we took almost the same amount off of our remodeled range. (multiple speakers) It's just a matter of looking at an overall showroom count, and deciding between new and relocation.

That doesn't have to do with what we are seeing in the results of the remodels. It is really more of a technical and a process issue because, again, given the amount that we are doing, combined -- remodels and relocations tend to be as difficult or even more -- create as much work in terms of getting those done as well. So, we want to make sure we are balancing, and that mix -- but in terms of the resources and teams that we have working on them, so that we do it in a prudent fashion.

Understood. Thank you.

Peter Keith with Piper Jaffray.

It's actually Jon Berg on this morning for Peter. Just a couple of questions for you here this morning. First, I wanted to look at the product margin, which looks like it was up 50 basis points in the quarter, and probably the slowest expansion I guess you guys have seen in quite a few quarters. Is there something abnormal in the quarter, maybe outside of weather, that impacted this? Or is this kind of the new normal, and how should we be thinking about that?

John, I think, to some degree, it's part of the new normal, that we really never expected to see 200 and 300 basis points year over year for multiple years. What we had always said is: We expected there to be continuing juice from each one of the product margin drivers, and we still believe that, whether it's lower product cost through the sourcing initiatives, or ASP discipline, or attachment of moldings and accessories. There is opportunity in each one, but it's not going to come at the same scale year over year as it had.

Certainly, it's always hard to handicap what the number would have been, had the sales been where we were originally targeting. But we are not unhappy with the margin expansion we got here in the first quarter.

Okay, thanks. That's very helpful.

It looked like in the press release you were looking at further exploring vertical integration. Can you talk more about how you think about vertical integration going forward: the investment associated with it, and how it could play out in margin in the coming years?

Yes, this is Rob. We think that's one of our true advantages as a company. When you look at the way we source, the way we go to market, our private label brands and products that we control, and obviously, that we do finish, ourselves, a significant piece of that today. What we are doing is taking that to the next level.

You heard me say that we are doing a relaunch of our Bellawood line. We've enhanced that finishing. We added and expanded to that assortment.

We think, as we vertically integrate additional finishing, which we are absolutely doing this year -- so we will be bringing in additional finishing lines into our warehouse here -- that's going to give us the flexibility and more control over the quality and the types of products that we are offering. It's going to give us more flexibility in terms of offering new products like Bellawood. That's very critical to our growth, as we look to shore up supply, and control the manufacturing process.

I think from there, as I mentioned in my prepared remarks, we are also looking to test with some key partners of ours, taking that a step forward in terms -- the acquiring of some green lumber, and the drying and the processing and milling of that, and then feeding that into our finishing lines as well. The natural progression up, if you, per se, up the food chain in terms of (inaudible). The finishing will be implemented this year. The other things we are testing this year and into next year.

Yes, Jon, ultimately, we wouldn't do this if we didn't see an opportunity to lower the net product cost or drive additional sales by having an expanded assortment of products available to us by doing this.

Just a little more detail around that is: One, the specific things it does -- getting control of the raw material when it comes in, is really a great benefit, particularly for a company like us that is truly a private-label brand, that we own our products -- as we get to control the material and the utilization of the entire raw material going into the process. That's something that we are very excited about. We think we can drive savings and benefits in the finishing, and then up into the supply chain a little bit, because then we will control all of the production and any of the utilization of the rest of the log as it goes through the process.

Okay, great. Thanks a lot, guys. Good luck in the remainder of the year.

John Baugh with Stifel Nicolaus.

This is a follow-up on that vertical test. Is that a domestic wood source opportunity?

It is.

It's where we are targeting it right now, yes.

Okay. My question was on occupancy. I think you said 50 basis points, Dan. We've now got 21% of the store mix. I think it was 4% a year ago, that are new remodeled. If we are going to remodel 80%, 90%, or having the new format is 80%, 90% of the stores at some point, how do we think about an occupancy number through time?

And then, I assume we are getting the sales leverage that makes sense, but just wanted color on that. Thank you.

Sure. The biggest step-up in the occupancy cost thing, as you noted, was the west coast DC is in there. We've talked about that, and as much as $2.5 million of occupancy in the year. And then called out about 10 basis points of weather. I think a lot of people experienced the additional CAM charges and clearing parking lots and whatnot, that relate to tough conditions.

The store base expansion itself -- the unit count growing against the store base has delevered occupancy. But the individual unit is not causing us significantly more in occupancy cost. We look at each unit as far as: In a more retail-centric corridor, there is a potential that it could cost us a little bit of base rent. There's a potential that that area could have higher CAM charges.

What we've seen thus far is that we haven't seen a real material change yet remodeling stores, or even the base occupancy cost of the Store Of The Future just because it is in Store-Of-The-Future format, if that makes sense. When I've made reference to store base expansion, it's really because the unit count has come in -- is adding to the store base, and the revenue that it's bringing is less than the average store.

Okay, that's very helpful.

There was no update on the investigation. You guided, I think, another $1.5 million of legal/professional for the remaining nine months. Refresh me: Is that -- I think that's a lower number than you've incurred, say, in the past three, six months? Any color around the investigation and how that expense trends out? Thank you.

From the numbers, we had said, I think, $2.5 million to $3.5 million last quarter with about a half of it in the first quarter. That's almost where it came in. We indicated about $1.7 million, I think, in Q1; and the rest of it will be Q2, Q3, Q4. It's certainly not at the same rate we've seen thus far.

As you noted, I think we indicated in our MD&A that we have now responded to the document request, and that's where it stands.

Thanks. Good luck.

Matt McGinley with the ISI Group.

My first question is on the comp increase that you reported from March 15 to April 15 -- you said was up a little bit over 11%. As you look at the gating of that from March 15 to April 31 versus -- I'm sorry, March 15 to March 31 versus April 1 versus April 15, did you have a step-down in April relative to what you experienced in March?

You mean if I divide the 30 days into two 15-day period, the actual -- the April increase was better than the March.

Okay. And what did you run in that same comparable period in the prior year?

There wasn't a whole lot of variability. I think we were up in the -- (inaudible) I think we were up in the 20%s, and it was pretty consistent over that same period of time.

What I would tell you is that with the east -- (multiple speakers)

-- mid-20%s.

-- between weather, the Easter shift, and the movement of the April sale, again, we have yet to ship all the new order build that we had as a result of the April Sale. But I would tell you: At the end of the April sale, with the washout of the calendar shifts, we are very pleased and feel good about where we are in terms of the customer demand, the new orders, and how much they've grown, particularly underneath, as you look at region by region.

As Dan mentioned, even though it was improved, we still see that drag in the impacted markets. They're building, they're improving, they're recovering, they're just taking time. And that slope of that curve is not as steep as we would like it to be. But it's going to -- (multiple speakers)

I appreciate the difficulties with the Easter shift and the big sale being a week later. As you look at those invoiced orders, and I'm sure you have years of trend to look at, would you expect that quarter-to-date number would be better than 11%? Or do you think that would be less than the 11% that you experienced in that March 15 to April 15 time period?

I think that was a pretty fair target for where we were looking at, given that period of time and the size volume, and again, as you indicated, what we were stacking on with the mid-20% last year. We were okay with what we saw there.

Okay. My other question is on the gross margin, and specifically what you called out with the product benefits that you had. I appreciate what you said before in saying that the law of large numbers, and you're never going to get the same level of benefit that you've got. But in terms of the level of promotion that you experienced versus less benefit from sourcing, how much of that step-down was driven by, I suppose, promotion levels versus sourcing, and I suppose, mix. Moreover, should that product base gross-margin gain be bigger in the second quarter than what you experienced in the first?

As far as throughout the rest of the year, we would expect that to increase. We are looking at a greater expansion of gross margin for the full year than we saw, given these 70 bps. Product will continue to take the lead in that.

As we said, transportation is probably still going to be somewhat of a drag, if not a wash, in Q2. And then it will start to create benefit in the second half, which tells you that product margin will drive gross margin expansion during the year.

You are still seeing a combination. When you look at that moldings and accessories number, you know that's adding margin. Premium product shift, ASP discipline, and then the sourcing initiative is lowering cost. We don't get into breaking out each one of them, but we still feel there's juice in each one of those.

We are obviously excited about the investments we are making. The west coast DC adds benefit. East coast DC, towards the end of the year, will come online. The finishing that we are adding in is going to give us, I think, some benefit as we get into next year as well.

Like we always said: We still feel very confident about long-term enhancement in the margin here coming in different amounts by different initiatives. We feel that each of the initiatives still have juice. But naturally, some will decrease over time, while others will step in and contribute.

Thank you very much.

Matt Fassler with Goldman Sachs.

My first question looks back at the color that you gave for the first quarter on weather-impacted versus non-impacted markets. Can you talk about the trend that you saw over the course of the quarter in the non-impacted markets? Was that 8.5% comp a relatively consistent trend, or did it move one way or the other from January through March?

March was strongest of the three months for that non-weather-impacted group. It was for the weather-impacted as well, but we just didn't see the same kind of movement. So, January, we had talked about as being a particularly -- I think, 11% up, 11% down, 12% up, 12% down -- in that range. February was even weaker; and March improved over February.

Got it. My second question: I just want to make sure that I understand the comparability of the numbers that you disclosed for that March 15 to April 15 period, and then the numbers that you gave for the April sale. So, when you talked about the orders that you booked during that four-week period from March 15 through April 15, I believe 11% or so comp. What number is that comparable to for the numbers you talked about for the April sale?

Matt, I'm sorry, I didn't follow you all the way through there.

It was the new orders is, I think, what we were referencing to.

(multiple speakers) Is that comparable to the invoice number? Is that the same metric that you discussed, or are those two different -- ?

No, they're different. For the April sale, we mentioned the invoice sales versus the new orders.

Got it.

-- new orders in the stub period.

Understood. So, is it your expectation that the orders would improve before the invoices?

Right. That we usually see that order build, and then it will turn into those invoice sales.

Yes.

Got it. That trend does not necessarily reflect any kind of deceleration. It's kind of apples and oranges, in terms of the data that you shared?

Yes, those numbers are, absolutely. Because we didn't share the new order number from the April sale. But I did speak to it subjectively that we are pleased with it. At the end of the event relative to the prior year, and where we are sitting in terms of our total open order book.

Again, I think it confirms our feeling about -- that this was a weather-impacted issue. And that it's coming back and recovering. However, there's a long cycle here, and we've got to let it -- kind of let it work its way through.

Got it. My final question relates also to merch margin. I know it's tough for us sitting here to see the puts and takes on merch margin and how hard you may have pushed promotionally as the Business slowed down a bit. One thing that we were able to discern in the quarter-end sale late in March was a bit more duration to the 0% financing offers. I'm not sure how material that is.

How would you say you approached the first quarter promotionally, particularly once it became clear that it was going to be tough to make the numbers? And how would that compare to the cadence you would expect for the rest of the year?

What I would tell you for the first quarter: We stuck to the plan we had going into it prior to the weather really getting ugly. So, there was nothing really within quarter that we changed dramatically. I would tell you that, year over year, as we have been the last couple of years, we've been testing and adding and increasing the reach and frequency of our advertising, putting in some additional promotions in between the bigger promotions to kind of drive that general message, speak to that casual consumer, bring them in, capture that market, and then flatten out the demand cycle for ourselves.

I think, overall, we probably -- as you look at the quarter, we probably did some incremental stuff in the beginning of the quarter, going in aggressive in January with some incremental events that may have been blunted by the weather. But as you got into the quarter, into the end of the quarter, it was pretty much a straight compare to prior year. But to your point, maybe some additional things within the event on the credit promotion, the length of it, the amount of it, what have you, but nothing that would be extremely material to the event.

Are those incremental moves likely to abate, or do you think they're going to persist as you move through the year?

I think, as we have the last couple of years, we are going to continue to stick to our long-term strategy of going after more market share, being aggressive in growing our Business. And the plan is: What's worked the last couple of years is going to continue to work, and we are going to stick to that strategy.

Got it. Thank you.

Keith Hughes with SunTrust.

Enough of the mid-March to mid-April earnings (inaudible) questions. A question about accessories: They were up as a percentage of revenues in the quarter, but at a slower pace than we saw last year. If you could provide any comment on where you think you are? Is that something where you're heading toward some saturation, or was that another weather-impacted number?

I would say -- this is Rob -- I'm sorry, Dan. I would say again, nothing systemic changing in our focus on that, and the results we are achieving from that. We are pleased with the improvement in the attachment rates, and something we focused on at LLU and our training. And we absolutely feel like we have improved significantly, but we think there's still more upside coming.

And this is where some of these initiatives work together. The Store Of The Future: When you get that new showroom, you get such a more full assortment and planogram and presentation of all of our accessories, including additional ones and the tools and what have you. It's so much easier for the customer to shop and to attach, and for the employees, our salespeople, as well to attach. I think there's a number of things that we think will continue to drive that attach rate over time in our advertising, our customer base, in our store format, and in our selling and training of our people.

Okay. It was 18.3% of sales this quarter; it was 18% last year. Is this a number, 19%, 20% -- do you have a feel of where you can get this to over time?

Keith, we never really talked about there being a hard ceiling. We know, as we look across our store base, that we can get -- we believe we can get through 20% -- into the low-20%s. But there isn't a hard number where we say 22% is as far as we can go.

We continue to look at what's there, what we can offer on the showroom floor. And as stores take on that expanded showroom format, what the potential can be delivered. You are right in saying we are not going to have those continued point increases like we've seen in the past. Again, as Rob said, there is still upside marching into the far upper-teens to low-20%s.

Okay. I was intrigued by your comments on backward integration in hardwood. I think you were referring to Bellawood there. Just to make sure I'm clear: You are moving backwards. You are going to be buying already kiln-dried lumber, or producing your own finished good there, is that correct?

We are looking at the entire process from green lumber through kilns, into the milling and profiling, to see where it makes sense to utilize our balance sheet, whether it's in partnership or owned, where we can have the greatest influence on lower net unit cost and controlling that quality.

So, it includes up to green. We are looking at pre-dried, where we would be in partnership, kiln drying it, processing it, milling it, and then fitting it into our [finishing] line. As it -- again, this year into next year is a test -- testing of those processes. But we're adding in (multiple speakers) -- the additional finishing capacity is going to be added in this year, which we are excited about, yes.

Would you consider doing an acquisition around that -- of a manufacturer?

We haven't taken anything off the table. It's intriguing to us, and we think there's opportunity there, as fragmented as it is. We are looking at all sorts of opportunities.

Okay. Final question: I think you may have addressed this, but I want to ask again. At about 2.6%, looks like ticket growth was -- in the quarter -- was that driven all by price increase per product and no mix? I think I saw some commentary around that in the Q.

It's never like [con] price increase. There is some product discipline where we increase the realized price, and that's usually our store people not ad hoc discounting. More to the moldings and accessories attachment this time, but also you do have premium product shift, as well as that price discipline.

Okay. Thank you.

Thank you for your questions. In the interest of time, I'd like to turn the program back over to Mr. Rob Lynch.

Again, thank you for joining us on today's call. As we look forward, our team is more energized and dedicated than ever to drive the strong results and growth that we believe is achievable long term for Lumber Liquidators. We look forward to speaking with you again on our next earnings call to report on our continued progress in executing our strategic initiatives to achieve our long-term objectives. Thank you.

Thank you. The teleconference has concluded. You may disconnect your lines at this time. Have a great day.