LL Flooring Holdings Inc (LL) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidator's fourth-quarter and full-year 2014 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 like to now introduce Ms. Ashleigh McDermott, Director of Financial Reporting for the Company. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, let me take a moment to reference the safe harbor provisions of the United States security laws for forward-looking statements.

This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating financial performance of Lumber Liquidators. Although Lumber Liquidator's believes that the expectations expressed in the forward-looking statements are reasonable, it can give no assurance that the 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 Liquidator's 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, and good morning, everyone. I'm here with Dan Terrell, our CFO, and we are pleased to be speaking with you about our fourth-quarter and full-year 2014 results, our current trends and our top priorities for 2015 and beyond.

Let's start with a summary of the fourth-quarter numbers. Total net sales increased 5.2% to $272 million. At comparable stores, net sales decreased 4.2% as our average sale weakened, but our customer traffic on a year-over-year comparison turned positive for the first time in 2014. Our operating margin was 10.5% for the fourth quarter, and net income was $17.3 million or $0.64 per diluted share.

Let me provide some color with regard to a key initiative implemented in the fourth quarter. This initiative produced benefits late in the quarter that are not readily apparent when reviewing the aggregate results.

As the availability of our entire assortment was materially restored, we implemented a range of marketing changes to strengthen components of our value proposition and enhance customer recognition of its competitive advantages. These changes resulted from a comprehensive competitive assessment of our value proposition, including customer perceptions.

The marketing changes implemented during the quarter featured modifications to our promotional focus, advertising cadence and outstanding advertised retail price points, offset by limited point-of-sale discounting. Customer reaction was rapid. And we saw improvement in the customer metrics we traditionally associate with interest in our products and the conversion of that interest into invoice sales.

As a result of these changes, and together with improved consumer sentiment, the number of consumers invoiced, our measure of traffic increased 8% in December and the month ended with open orders up $18 million, or 69% above December 2013. Though we pressured our gross margin in the fourth quarter, we believe we captured market share and drove operating income. Year to date in 2015, I am pleased to say we have maintained that momentum.

For those of you who have heard me speak over the years, you have heard my consistent enthusiasm for Lumber Liquidators and our tremendous potential to grow, both on the top line and at the operating level. Despite the challenges of 2014, that enthusiasm has not wavered one bit. We have a superior product, dedicated and energized employees, a growing presence in new markets and improving infrastructure and a value proposition to customers that is simply unmatched in the marketplace.

That said, 2014 was not the year we envisioned. We all know the circumstances around our sourcing, supply chain and weather-impacted demand, so I'm not going to revisit those topics.

What I will say is this, I firmly believe that our competitive advantages are intact and we have a keen focus on continuous improvement in all that we do. Though we have come a long way since 2011, we are not satisfied with where we stand. We have had significant success but also our share of growing pains.

The key investments we have made in our supply chain, merchandise allocation and visibility and intelligence, product development and training, allow us greater flexibility in positioning our value proposition. We understand that comprehensive analysis and strong execution must be our focus to fully realize the potential benefits.

I want to walk you through our strategic initiatives and our outlook for the business. But first, I want to turn the call over to Dan for a detailed review of the financial results. Dan?

Thank you, Rob, and good morning, everyone. Today I will provide details on our results for the fourth-quarter and full-year 2014, provide our outlook for 2015 and update the financial considerations of certain key initiatives. Please note that my references to percentages and basis point changes are in comparison to the fourth quarter of 2013 unless otherwise noted.

I'll begin with the fourth-quarter results where net sales increased $13.6 million, or 5.2%, to $272 million with an increase in non-comparable stores of $24.5 million and a decrease in comparable stores of $10.9 million, or 4.2%. Net sales were short of our expectations, but we were pleased with the customer traffic trends in December and the substantial build in open orders, up $18 million or 69% in closing the month and the year.

A quick note on the 2014 finish, in the six-day period between Christmas and year end, where we have historically had a relatively small build in open order balance, which means we take in more new customer orders than we invoice as net sales. In the current year, instead of a small build, it was $7.5 million, as new orders were driven by a surge in customer traffic.

Contrast that to the last six days of 2013 when severe weather was already adversely impacting customer traffic. In that period our team actually invoiced more sales than they took in as new orders and our open orders decreased. Though we would have achieved our top-line expectations in the fourth quarter of 2014 had we invoiced more of this build, it is certainly one of the contributing factors to our strong start early in January 2015.

Let me next provide some details around our average sale, which in the fourth quarter was down 5.3% to approximately $1,660. The decrease comes primarily from a lower average selling price of flooring, partially offset by a continued increase in the sales of moldings and accessories, which grew 70 basis points to 20.1% of our merchandise mix.

The lower average selling price is due to two primary factors, both of which we believe drove increases in the number of customers we invoiced during the quarter. First, the availability of our entire assortment was materially restored during the quarter, which helps shift our sales mix to flooring categories such as laminates and vinyl that have lower-than-average retail price points.

Second, as Rob mentioned, we implemented changes to the marketing of our value proposition, which on a net basis in the fourth quarter lowered the average retail price offered on like-kind product relative to the fourth quarter of 2013. We partially offset a portion of the retail price impact by significantly limiting ad hoc discounting at the point of sale.

We believe our conversion rates of customer interest into invoiced sales benefited from both restored availability and changes in our retail prices. And as a result, the number of customers invoiced in our comparable stores increased 1.1% in the fourth quarter.

Turning now to our non-comparable stores, which included 34 new locations opened in 2014 with 3 opened in the fourth quarter. As many of you know, we have opened 64 stores with the expanded showroom format, basically all of our new locations in 2013 and 2014.

Though 2014 presented challenges for all of our stores regardless of their maturity or showroom style, we believe these newer stores featuring the expanded showroom and located in more retail-centric areas of a market, continue to outperform our historical model on both a net sales and ROIC basis at comparable maturity. We are also two years into a multi-year plan to remodel existing stores, and we have now remodeled 39 existing stores with 20 remodeled in place and 19 relocated within the primary trade area. Together with the new locations, 29% of our 352 stores feature the expanded showroom format at of December 31, 2014.

Moving on to gross margin, which was consistent with the third quarter of 2014 at 39.2% and represented a decrease of 160 basis points in comparison to the fourth quarter of 2013. As most of you know, we second grade our gross margin drivers into those associated with our product, including shifts in our sales mix and changes in our average selling price, those associated with transportation and those associated with all other costs, including inventory shrink and reserves for loss or obsolescence.

I'll begin with the product, which decreased 160 basis points when comparing the fourth quarter of 2014 to 2013, and followed a 210 basis point increase in the fourth quarter of the prior year. I will briefly touch on each of the four primary categories impacting our sales mix and product gross margin.

First, our non-merchandise services where the mix grew primary due to the continued roll-out of our own installation services. Though these services drive operating margin expansion and represent incremental revenue, the average installation transaction is at a much lower gross margin than our average merchandise transaction.

In addition, we pass our actual cost of store-to-customer delivery through to the customer with only a small markup to cover administration. In comparison to the fourth quarter of 2013, non-merchandise services pressured gross margin approximately 30 basis points. In 2015 we plan to double the number of stores utilizing our own installation services and we also expect the attachment of store-to-customer delivery to increase as we continue to broaden our appeal to a more casual customer.

Second, we believe gross margin was adversely impacted by up to 70 basis points, primarily due to the Bellawood transition and clearance of products not a part of our continuing assortment, including certain domestic substitutes for products previously constrained. Third, we believe the merchandise mix of moldings and accessories, which have a gross margin higher than the average flooring transaction, benefited gross margin by approximately 20 basis points.

And, fourth, we believe the net impact of changes to the marketing of our value proposition reduced gross margin by approximately 80 basis points. The net impact of these changes generally resulted in lowering the average retail price offered, an adverse impact to gross margin that was partially offset by significant reduction in ad hoc discounting at the point of sale and a greater up-sell to premium products.

In transportation, lower international transportation costs led to a net gross margin increase of 10 basis points. Aggregate international container costs decreased its rates to our West Coast distribution center were significantly less than to the East Coast. But partially offsetting this benefit were higher domestic transportation costs due to increased unit flow, including a fourth-quarter 2014 build in available inventory per store.

All other costs reduced total gross margin by a net 10 basis points, due primarily to higher costs of shrink and an increase in our inventory reserves for loss and obsolescence, including costs related to the Bellawood transition. Selling general and administrative expenses for the quarter increased $6.5 million, or 9.2%, to $77.8 million, due primarily to higher occupancy, depreciation, advertising and payroll expenses. And as a percentage of net sales, SG&A expenses were 28.6% in the fourth quarter, compared to 27.6% in 2013's fourth quarter.

Salaries, commissions and benefits increased $1.3 million, or 4.4%, but decreased 10 basis points as a percentage of net sales to 11.8%, due primarily to lower accruals related to our management bonus plan. Advertising expenses increased $1 million, or 6.3%, and increased 10 basis points as a percentage of net sales to 6.4%, as we continue to aggressively broaden our reach and frequency, which was partially offset by leverage of our national spend.

Occupancy expenses increased $1.9 million, or 21%, and increased 60 basis points as a percentage of net sales to 4.2%, due primarily to store-based expansion, the opening of our West Coast distribution center and approximately $200,000 of incremental transition expenses as we began the consolidation of our East Coast distribution facilities. Depreciation expense increased $700,000 or 22%, and increased 20 basis points as a percentage of net sales to 1.4%, due primarily to store-based expansion, our program to remodel existing stores, and investments in technology and the opening of our West Coast distribution center.

All remaining SG&A expenses increased approximately $1.6 million, primarily due to higher bank card discount rates, including those on extended financing terms, the timing of certain business taxes, increases in tender loss and certain transition and consolidation expenses related to our East Coast distribution center. Operating margin was 10.5% in the fourth quarter of 2014 and 13.3% in the prior year.

The effective tax rate was 39% and 39.3% in the fourth quarters of 2014 and 2013, respectively. Net income was $17.3 million or $0.64 per diluted share based on approximately 27.2 million weighted-average shares outstanding.

Now I'd like to summarize our results for the full year. Net sales for 2014 increased $47.2 million, or 4.7%, to $1.047 billion, with an increase in non-comparable stores of $90.1 million and a decrease in comparable stores of $42.9 million, or 4.3%.

Gross margin was 39.9% for 2014 and 41.1% for 2013. SG&A expenses in 2014 increased 10.2% to $314.1 million, and as a percentage of net sales, were 30% in 2014 and 28.5% in 2013. The effective tax rate was 38.8% in both years. Net income in 2014 was $63.4 million, or $2.31 per diluted share, based on 27.5 million weighted-average dilute shares outstanding.

Turning to our financial position, liquidity and capital resources, cash and cash equivalents were $20.3 million at the end of 2014, as operations for the year produced $57 million, capital expenditures used $71 million and net investing activities, including our share repurchase plan, used $46 million. Available inventory per store was $756,000 at year end, up 5.5% from the beginning of the quarter and up 13% over the end of 2013.

Increases during the quarter were primarily due to weaker-than-expected net sales, safety stock build in our distribution centers, increases in merchandise categories previously constrained and increases in moldings and accessories. Capital expenditures for 2014 are significantly higher than 2013 due to store base expansion, the remodeling of existing stores, operating equipment related to our new distribution centers of approximately $39 million in 2014, and expansion of our finishing, vertical integration projects which incurred approximately $9.5 million in 2014.

Turning now to our outlook for 2015, strong customer demand has continued in the first quarter, particularly in comparison to the start of 2014, which was weakened by the severe winter weather. I know many listening today in parts of the Northeast and Midwest may question whether the current year isn't just as difficult as the prior, and it may well be. But in our results, the 2014 winter was unusual in combining severity, geographical scale and duration.

As we disclosed in earnings release this morning, net sales through February 23 were up 21.4%, with comparable stores up 12.1%, driven by a 16.8% increase in the number of customers invoiced and partially offset by a lower average sale. Further, open orders had increased 24.5% over the balance of February 23, 2014. With the significant spring flooring season ahead, we expect these percentage increases to moderate and currently expect first-quarter increases in comparable store net sales to range from the mid to high single digits.

I'd also like to touch on the impact of our East Coast distribution center transition and consolidation, which we expect to be completed by March 31. We expect to incur $1.5 million of incremental transportation costs in the first quarter as merchandise is transferred to the new distribution center. In addition, we expect to incur $1.2 million of incremental SG&A expenses, including payroll, occupancy and other expenses in the first quarter.

Overall, the marketing changes implemented to date have shifted our net sales mix and lowered average retail price we receive from customers. As such, we currently expect first-quarter 2015 gross margin in the range of 38% to 38.5%. Finally, we expect SG&A expenses to increase 9% to 12% over the first quarter of 2014.

I'd also like to provide an update on the preliminary anti-dumping duty rate issued by the Department of Commerce in January 2015, pertaining to multi-layered wood flooring from China. I encourage you to read the complete disclosure included within our 10-K filed this morning.

In the context of our outlook for 2015, understand that we have not considered any change to the duty rates applied to our engineered hardwood imported from China. And if those preliminary rates become final, we would incur a loss of approximately $5.7 million on purchases through November 2013, the end of the period included in the second annual review. The final ruling on the second review is expected in May 2015, though certain appeal periods are expected thereafter.

Our outlook for 2015 anticipates moderate improvement in the marketplace for residential wood flooring, marked by periods of volatility when our customer may be cautious and price-sensitive. Within the flooring market, we expect demand for wood flooring to continue to take share from carpet. We expect net sales for the full year in the range of $1.14 billion to $1.21 billion with an increase in comparable store net sales of 3% to 9%.

We expect to open 30 to 35 new store locations in 2015 and remodel 15 to 20 existing stores, all in our expanded showroom format. We expect to increase the number of stores where we provide our installation services from 85 at the end of 2014 to 150 by the end of 2015. While this expansion is expected to drive increases in net sales and operating income, we expect 20 basis points of gross margin pressure in comparing 2015 to 2014.

We expect increases in the number of customers invoiced as we continue to implement marketing changes to strengthen our value proposition, partially offset by a lower average sale. We expect the net effect of our changes to lower the average retail price offered, significantly reduce ad hoc discounting and facilitate more effective up-sell to premium products in each merchandise category. We believe the adverse impact on gross margin may range from 60 to 100 basis points, but expect to gain market share and drive operating income as a result.

We expect the adverse impact of the Bellawood transition and clearance of certain products not a part of our continuing assortment, to be 10 to 20 basis points in the first half of the year, with no material impact in the second half. We expect moldings and accessories to increase as a percentage of our merchandise mix and drive 20 to 40 basis points of gross margin expansion.

We expect our transportation and other costs to be gross margin neutral in 2015. We expect certain transportation benefits from our new East Coast distribution in the second quarter just as we anniversaried the benefits of the 2014 opening of our West Coast distribution center.

Fuel costs are expected to benefit domestic transportation costs but driver shortages may increase lane rates. We expect higher unit sales in 2015, partially offset by lower average inventory levels in the second half of the year.

We expect to continue to invest in our quality control and assurance processes, as we have done in each of the last four years. Finally, we expect greater costs of samples as demand strengthens and higher cost of shrink due to greater inventory levels and product transitions.

As a result, we expect full-year 2015 gross margin to be in the range of 39% to 40%, with the second half generally stronger than the first. We expect capital expenditures to return to historical levels between $20 million and $30 million.

Net SG&A expenses are expected to increase 6% to 12% over 2014 due to store-based expansion, transition in the full implementation of East Coast distribution operations, legal and professional fees, which continue at elevated levels, higher incentive compensation and greater depreciation, including recent infrastructure investments. We expect advertising expenses to range as a percentage of net sales from 7.3% to 7.6%, down from 7.9% in 2014.

Once the East Coast distribution center is fully transitioned and consolidated, we expect a net $3 million shift out of occupancy expenses and into depreciation. We believe the new facility provides the potential for more efficient operations, though we have not included those benefits in our current outlook for 2015.

As a result, we expect 2015 earnings per diluted share in the range of $2.50 to $3, based on a diluted share count of approximately 27.2 million shares, exclusive of any future impact of our stock repurchase program or resolution of any legal or regulatory matters not accrued at December 31, 2014. I'll now turn the call back over to Rob for his closing remarks.

Thank you, Dan. With the infrastructure for future growth in place, we intend for 2015 to be a year where improved execution across our operations begins to level those significant investments. Our competitive strengths, including our value proposition, direct sourcing from the mill, our uniquely profitable store model and our people, are intact. Improved execution will only widen our competitive advantage.

As I mentioned earlier and Dan expanded upon, we began implementing marketing changes to strengthen our value proposition in the fourth quarter, and we have had strong customer traffic since. This will be a process we continue in 2015 and will touch each component of our value proposition.

We have new flexibility and visibility as we consider the marketing of our value proposition, as 2014 infrastructure investments combined with our fundamental principles, including enhanced merchandise allocation intelligence, expanded capacity in our supply chain and continually increasing investment in quality control and assurance, a willingness to commit significant resources to increasing the rates of our advertising message, greater control over our assortment of proprietary brands and a highly-motivated team of flooring experts.

We will continually assess and enhance customer perception of our value proposition. We believe the components of our value proposition are individually the best in the industry and we will focus on the combination of price, assortment, availability and quality, delivered by flooring experts in an effort to maximize our market share and operating profit. Our competitive advantages are clear, with the investments for future growth in place, one of our key 2015 areas of focus is ensuring that operational execution enhances customer perception of those advantages.

We continuously challenge the overall marketing of our value proposition, that is not new for us. But it is particularly important to do during times of significant growth and the implementation of a range of strategic initiatives and infrastructure investments.

One example of a marketing change has to do with our retail prices, what we offer, versus what we realize as a final price to the customer. We will take advantage of the great values we offer by advertising those prices nationally and on the web. We set prices based on competitive analysis, which includes robust discussion with our store management teams. This process eliminates the need for ad hoc discounting at the point of sale.

One other area where we want to continue to drive improvement is in our sourcing. Since our sourcing model is a key component of our value proposition, we have direct relationships with more than 130 mills around the world.

We believe those relationships enable us to offer the highest quality products and the broadest assortment at the lowest prices. As we have strengthened those relationships over the years, we have also maintained our commitment to uncompromising integrity across all areas of our operations and we require the same of those we do business with.

I want to also reiterate our position on product safety. We now believe the news program, 60 Minutes, will feature our Company in an unfavorable light with regard to our sourcing and product quality, specifically related to laminates. We believe their story will be a derivative of the Prop 65 matter and Bolero matter disclosed in our 10-K.

We have not factored any adverse impact on customer demand into our 2015 outlook, though we will vigorously challenge any false allegations or factual incorrect presentations. Every media inquiry provides an opportunity for us to reiterate our firm commitment to the safety and quality of our products. Our processes are designed to ensure that our products meet or exceed required standards in every market in which we do business and undergo thorough independent third-party testing.

We also perform substantial in-house testing in many locations around the world. We have recently opened our new advanced testing facility located at our East Coast distribution center to further enhance our compliance capabilities.

This lab has emission-testing capabilities that mirror those set by the California Air Resource Board, or CARB. We know of no other flooring retailer that goes to this effort to ensure the quality of its products.

Our rigorous quality control processes include steps designed to ensure compliance with the low-emission standards set by CARB. Although CARB regulations are only applicable in California, we apply these stringent standards to subject products we sell everywhere we do business.

In addition, all of our suppliers of these products are either themselves certified under California regulations or source their core materials from certified manufacturers. We verify the status of these suppliers and manufacturers by using CARB's own resources.

This provides us an extra level of vigilance as we seek to provide the highest level of quality to our customers. As a result of our continuous commitment to quality, the products you buy at Lumber Liquidators meet CARB's standards and are absolutely safe.

And finally, we are transparent about our quality control and assurance processes. Our flooring meets the highest quality and environmental standards, that's why we sell it, that's why we use it in our own homes and that's why we are a market leader. We don't just follow the letter of the law, we set the bar even higher so that our customers enjoy the best and safest products in the world.

Turning to the store-based expansion and services we offer. We are pleased with our market-based real estate strategy and the financial results of our expanded showroom format. We will continue both store-based expansion and our remodeling program at a measured pace similar to 2014, though we may accelerate unit counts as opportunity exists.

By the end of 2015 we plan to be offering installation in up to 150 stores, up from 85 at the end of 2015. We believe that by improving the customer experience and making it easier, we also improve our opportunity to win future business.

In addition, we have substantially upgraded our distribution capabilities on both coasts, which we believe will not only result in margin improvements, but also improve inventory management. Additionally, using our merchandise planning and allocation system we implemented in 2014, we are able to forecast store-level inventory to more accurately align to each store's sales. We believe this improved visibility will lower overall inventory levels in 2015 and bolster our ability to aggregate and recognize situations which threaten the availability of inventory.

Finally, our people are the essential component to a successful value proposition and to the strong execution required to deliver on its potential. Hiring, training and retaining the best people to serve our customers continues to be a top priority in 2015.

We recently held our fourth annual Lumber Liquidators University that brought all of our stores and leadership teams together to further reinforce our unified, long-term vision and to communicate our 2015 strategic priorities and goals for the Company. This year we focused on our strategy to rededicate ourselves to our value proposition while leveraging all of our recent investments. Our entire team strongly embraced this message, exiting LLU, our team's dedication, sense of urgency and commitment to delivering results was stronger than ever.

In closing, our core business model is strong, our competitive position is robust and our plan for 2015 is to execute and deliver on the significant potential of our 2014 infrastructure investments. I could not be more optimistic about our growth potential, operating margin expansion and value creation for our shareholders in the coming years. Operator, we are now ready for questions.

(Operator Instructions)

Our first question comes from Simeon Gutman of Morgan Stanley. Please proceed with your question.

Thanks, good morning. So, Rob, my big question is if the value proposition is intact, which you mentioned, why make the adjustments? Why lower prices?

I realize it's a little bit loaded, because I think lowering them, you're trying to avoid the mark-downs. But your gross margin guidance 39% to 40%, and that's still with less mark-downs, meaning it's still lower than where this business was. So are you lowering the margin rate of the business? Or do you think you're going to be able to bring it back up over time?

Thanks, Simeon, this is Rob. So as we got our product back in stock and we're beginning 2015 going into it, we wanted to make sure that we specifically look closely at competitors and that we were priced right out there and living our value proposition, which is critical to us, and price being foremost in the value proposition.

Last year with some of our constrained product issues, as we talked. Some competitors took advantage, buying items we were out of stock of, took advantage of those products, altered some of their prices and assortments to serve customers that we couldn't serve last year. So we wanted to make sure that we came out very strong this year, reassessed all the parts of the value prop and made sure we were investing in it the way we should.

As we saw the year, we're excited about this year, given what we're up against, the prior year and also given all the investments and the infrastructure that's in place. We wanted to arm our people with the best prices and the confidence that they need now that we're back in stock to go out there and clearly lead in the price part of the value proposition.

So to your point about can they come up? Absolutely. I would tell you that this is the bottom. What we did is we just wanted to make sure we completely leveled the playing field and showed that we had the advantage on price out there, and we always will and we will live up to that.

That's what we're doing. This is an investment, an upfront investment into the value proposition that I could say that you can trust that we will calibrate, SKU by SKU, and down the road if appropriate. We don't want to give away any margin if we don't have to, but we also want to make sure that the gap is wide on price.

Thanks.

Our next question comes from Aram Rubinson with Wolfe Research.

Hey, thanks for taking the question. Wanted to talk about inventory. I think over three years the sales per store are up 12%, the inventory per store is up 42%. The DSIs are up another 20 days here.

Can you help give us a sense as to what, when you peel back the onion, what's there? What would you like not to have if you had your druthers? How much less inventory would you have? And what's the plan going forward to actually reduce it without crushing any margins?

Yes, this is Rob. I'll start and then pass it over to Dan for some of the specific numbers. But what I would tell you is that with some of the constraint issues we had last year, obviously we brought in substitute products, we had the Bellawood transition.

So the issue there relative to cartwheeling the old SKUs and the new SKUs. And then also going into this year, the Chinese New Year and also some of the port issues on the West Coast, we bought in very big. Again, we wanted to make sure, again, back to the value prop, that we had availability, that we had the fuel in the tank.

I would tell you one thing we're doing now, and then I'll flip it to Dan, is we're leveraging very carefully this new visibility into our allocation systems and intelligence, and are delivering store-specific, top-selling inventory that's needed by store. And as we're doing that and the stores and regions we've been testing it in, we've had good results.

I've been in some of these stores and I'm seeing within our levels of inventory, we have very strong sales and productivity of that inventory, the best I've seen since I've been here. So that's why we're projecting that we think the leveraging of this system is going to, potentially as we get through the year and implement that across all stores, is going to pull down inventory.

And, Aram, I'll just add it was hard to believe that I didn't have everything in my prepared remarks, but in the K it's got that we're still going to look for $640,000 to $690,000 per store by the end of this year. And by mid-year 2015 average inventory levels will be less than 2014.

As Rob said, we have two new tools. We obviously have a new distribution center on the East Coast, which I think is going to be significant. And when we opened the West Coast DC, we put in a merchandise allocation system, the benefits of which were a little lost primarily because of what happened in our inventory assortment during 2014.

But looking at those two together, the inventory intelligence we have and a focus on execution, gives us an opportunity to lower inventory levels in 2015, certainly by the end of the year, and that may be only one step. We want to be careful to protect the availability of the product, as Rob said. We learned a valuable lesson about how key availability is. But with good execution and these tools in place, better intelligence, we can lower those inventory levels.

Thank you, Dan. I only got one question, so I'll save it for our conversation later.

Okay.

Our next question comes from Matthew Fassler with Goldman Sachs.

Thanks a lot. I'm going to ask a different question from what I originally intended because since you mentioned "60 minutes" your stock is down 10%. And I guess I'm interested in what -- I know that you're not going to make their case for them, but what is your affirmative assertion about some of the issues that seem to be out there, that you cite in your K and brought up, I guess, through litigation about the safety of the product relative to some of these testing regimes?

Matt, what I want to clearly say is that we've been dealing with some of these allegations for a couple years now going back to 2012 and 2013. What I would tell you very confidently and clearly is that we are a leader in safety. We are proud to sell the products that we sell, they meet the highest quality and environmental standards in the nation, and they are safe.

They're compliant. We specifically spoke to the regulations in California that are the most stringent in the US and that we apply those nationally. And we are confident in the suppliers that we are buying from and the fact that they are certified and compliant relative to those regulations and standards. We check them and over and above, also, above what's required of our own testing, not the testing of investment there. So we know that our product is safe and it is compliant.

And just as part of this same question, presumably, do you know when this episode is likely to air?

We don't know exactly. They haven't told us that, but we believe that it's potentially this weekend.

Okay, thanks so much.

Our next question comes from Greg Melich with Evercore ISI.

Hi, this is [Ottomo Wintermetly] in for Greg. I wanted to ask a question about SG&A, you mentioned the SG&A growth of about 6% to 12%. How would that change based on sales? So, for example, if you come to, if the SG&A level, how would that change?

We believe we've got the opportunity to adjust some of our advertising spend along with these marketing changes. How we go to market, how strong the overall value proposition, somewhat determines how our conversion rate will be to close sales, what we need to offer as far as the extended financing in advertising.

And that's why we believe there's an opportunity to see some leverage. Always one of our larger spends next to payroll and we think that has at least 30 basis points of leverage in there and potentially more.

In payroll, we believe there's some opportunity to challenge our staffing matrices and as stores progress up their maturity curve, to get some leverage that we haven't had before. So we believe there's an opportunity to leverage some payroll costs.

On the other side, there are higher, legal and professional fees are going to stay elevated. We do expect a change in occupancy and depreciation as we open the new warehouse facility. As I said in my prepared comments, there's upside potential, so we could go towards the lower end of that SG&A increase range. We're just not building a lot of it into the overall guidance.

Thanks very much.

Our next question comes from Peter Keith with Piper Jaffray.

Thanks for taking the question and for all the details this morning. I want to talk about the impact of the pricing changes and then this recent uplift in sales you're seeing, because you are lapping now the pretty sharp sell-off in your comp trend.

So can you help us try to break out the -- is it a benefit from the pricing change? Is it a benefit from the macro? Is it a benefit from the compares? More explicitly, are you seeing a lift in non-weather-impacted areas that gives you confidence that the pricing change is working?

Yes, Peter. It's hard to break out the changes, but we can say that we felt the inflection as soon as we made some of the marketing changes. That was really the Black Friday weekend and we saw some strength coming there. Continued to implement them and saw traffic increase substantially.

No question, some areas of the country had a really tough January and February last year, really even in December. But we're seeing performance across all of our regions.

So one reason we put in the press release this morning was a 16.8% CAGR was to look at what the compound annual growth rate was for that period over three years. 2012 itself was a pretty strong first quarter, certainly 2013 was, 2014 was somewhat weak. So it help put it in perspective.

But I would tell you, no question the comparisons are easier, but the marketing changes drove the traffic. And that's really based on what we're seeing across the country. We've been encouraged by what we've seen. We think that's going to continue through the year and that's why we believe traffic will carry our comp number in 2015, partially offset by ticket.

Peter, this is Rob. Just to add a little color, it's something that we did as we were getting to the end of the year, something that we did regionally and then also in specific categories. So we saw the immediate impact category by category in the markets, so that was a clear sign to us as well. I just wanted to add that.

Okay, thanks for the color. Appreciate it.

Our next question comes from Budd Bugatch with Raymond James.

Well, that always amuses me how I get handled. Good morning, and thank you for taking my question.

(laughter) That's a new one.

Yes, there are many new ones. I'm going to ask a different question than I originally intended to ask as well. Because there was another footnote in the K that seemed to have new language regarding the Department of Justice investigation. Can you expand or talk anything about that, the update on that investigation?

Sure, Budd. We had that as an other consideration and we moved it all the way into a footnote, and it's also in legal matters. It had previously been, they had issued a subpoena, we had replied to the subpoena. We were working on providing all the information that was requested of us.

We are now having conversations with the Department of Justice. We believe they're at a point in their investigation where it's time to sit down and start looking at next steps that have gone beyond just providing the information. So because of that, we're looking at it as an item more as a contingent liability in trying to assess where it'll go.

It's very early in the process. It could take a quarter, it could take two years. But what we've seen is now we're having conversations, we're beginning or we're scheduling dialogue with the government that wasn't happening previously.

Thank you. But there was also the language that says they're contemplating criminal charges. Is there any further help you can give us on that?

I think there was always that they were either going to come with a misdemeanor or a felony under the Lacey Act. So we believe that that's what they're going to come to the table with and begin the discussions on.

I think the only other alternative is that they would have dropped the investigation. But really, that's no change in what we've been looking at ever since we got the subpoena.

All right, good luck on it. Thank you.

Our next question comes from Brad Thomas with KeyBanc Capital Markets.

Thanks, good morning. To follow up on the trend in comps, I was hoping to ask about average tickets. Obviously in the quarter, a number of items affecting it that may be temporary in nature. I was wondering if you could call out how much might be unique to the fourth quarter and some of the Bellawood transition promotions.

And as we look forward, what your outlook is for ticket, given the strength that you're seeing in the quality of the engineered and the hardwood lower price point products. That opportunity that you do still have, of course, to trade people up to this new Bellawood line. Hello?

(technical difficulty)

Brad, are you still there?

Do we have you back, Dan?

Yes, we do. Apologies for that.

Did you hear my question? I left you speechless.

We could hear you guys the whole time. Somehow you couldn't hear us.

I heard about average sale and I started to explain that, Brad. About 3% was what we were down in Q4, we are were up 1.1% in traffic. We expect that down 5.3% to moderate as we go into 2015.

You saw that it already had somewhat in Q1. We expect that to continue to moderate so that we still expect the average sale to be down, but more like 3% to 4% throughout 2015, not as significant as that 5.3% was in Q4.

All right, great. And if I could just squeeze in a housekeeping item on the anti-dumping matter.

Right.

You all obviously quantify the historic impact if there's a ruling on that. As we look forward, if you did get an unfavorable ruling within the range you've quantified in the K, what kind of a drag could that have on gross margins, on a go-forward basis, if this ruling was applied?

Yes, well, Brad, you saw -- I mean, applying it over about a two-year period would have been about a $12.5 million impact. We're accruing now at about 6%. That ruling is at 18.3, we think that's up for a second look. And then the appeal process, it usually lags by about a year to 1.5 years.

But if we have to start putting deposits down at 18.3, we are already looking at shifts in our assortment, how we're going to source product in 2015. We're diversifying the assortment over multiple countries, we're looking at different constructions. It will take some time. I would tell you that 2015, even though it's a more significant year sales-wise, would have a lesser impact in what we disclose in the K, simply because we're already in the process of transitioning some of that demand.

Got you. And just to be clear, your current guidance does not include accruing it for this year?

It doesn't. And if for some reason that ruling becomes final, we'll certainly call that out and put special attention on it, so that everybody can see it and be very clear on it. But we do not have anything anticipated in 2015.

Got you, thanks so much.

Our next question comes from David McGregor with Longbow Research.

Good morning. A question on the forward look on comp growth, and what you're expecting in terms of overall category growth to start with. And then secondly on maturation, with all the changes going on, are you expecting any change in terms of the first-, second-, third-year productivity growth in your stores?

David, yes, from an overall macro outlook, we think it's going to be a slight tailwind, low single-digit. Still feel like there's a lot of uncertainty out there, but you do see improving employment, improving consumer sentiment.

The housing numbers get a little sketchy, but they're still positive on a year-over-year basis. Access to credit is going to be an interesting discussion throughout 2015. Definitely believe hard surface flooring takes share from carpet.

So that said, you might look at a small 2 to 3 percentage point lift out of the macro. Maturity curve is there, we opened 34 stores on top of 30. We're actually seeing that maturity curve outperform our historic model. And while that outperformance may narrow as those stores mature, we still believe that's going to be a benefit to our comp sales.

Get back a little bit as far as cannibalization, 300 to 400 basis points that we've seen historically there. The big question then comes with how effective these marketing changes are at driving and capturing share. They've been very effective so far. If they continue, we'll be towards the higher end of that range. If it moderates, we may be towards the lower end.

Thanks for the detail, Dan.

Sure.

Our next question comes from Dan Binder with Jefferies.

Hi, this is [Dahl Forburton] in for Dan. Back to the changes in mix and the promotional changes. Looking long term, beyond this year, where do you think long-term gross margins can get to? Thank you.

We've always looked at margins going to the low to mid 40%s. We still believe over a multi-year period we can get to 42%, 43%. We really look at the business on can we drive operating margin. What can we do to get operating income higher, drive operating margin expansion? And we still believe there's an opportunity to get to the low to mid teens over the next few years.

So this is a bit of a reset. We put a lot of infrastructure investments in place. It allows us a lot of flexibility in how we position that value proposition. Execution has come under question. We still need to show that we can execute with these tools and rebuild that.

But we do believe the opportunity's there. We're going to address ad hoc discounting. That had been an issue that we need to take care of. And you need to take care of that with outstanding prices and working closely with the field, and we'll do that.

There are a number of areas where the gross margin can continue to expand, though, from attachment of moldings and accessories to premium product up-sell, to once again doing line reviews and whatnot that can lower your overall costs. We're investing in vertical integration and finishing capacity, which we think longer term has the opportunity to lower some product costs as well.

In the SG&A, if we see this constant repositioning of marketing drive traffic, we'll question about what SG&A structure is needed to support that. And we think there's some opportunity to lever a little faster in future periods than we had been considering.

So 2014 was a tough year, it's been a bit of a reset. We're going into 2015 quite conservatively, but we still believe the long-term opportunities are there.

Thank you. If I may, quick question. Now since things have normalized, have you seen any discernible changes in consumer tastes starting out this year? Thank you.

Not necessarily. Color and style is something that we absolutely always focus on. We recently conducted a very thorough consumer research study about that. So we're always looking at it, we're always using it to be out front to drive our assortment, again, our selection, those colors and styles and being the leader out there as part of the value proposition. So we're always looking at it.

Specifically, we've seen some trends the last year or so in the areas of more of the rustics. And interestingly, the gray trend that's been out there, I'm sure everybody is aware of. We're obviously aware of that, we're assorting to it and taking advantage of it.

Thank you.

Our next question comes from Seth Sigman with Credit Suisse.

Okay, thanks for taking the question. Two quick follow-ups here. First, the decline in average sale, that you talked about, average ticket down 3% to 4% going forward, can you break that down a little bit further?

What are you seeing there? is it the size of the projects, maybe a different customer? Do you have a little change in the mix there that would be skewing that? How are you thinking about that?

Two primary drivers are a change in the average retail price on like-kind product. And that's a result of these marketing initiatives. And then we have seen a change in mix towards the lower average retail price point.

Haven't seen a whole lot of move in the project size or the units per ticket. Really what we've seen is people -- as we got back in stock, we saw people gravitating towards the laminates, the vinyls, the bamboos. That had been a longer-term trend as well. The marketing initiatives began in those product categories and we saw an even greater shift in the sales mix.

We had a combined impact of shift to these lower average retail price points and then they were lower on the offered price than they had been. And then partially offsetting that was the elimination of the ad hoc discounting around those products.

And then it was easier for our people to up-sell to a premium product. So by having a more logical pricing matrix, a little different advertising strategy, our people were able to work the up-sell within those merchandise categories to help offset some of the loss as well.

Okay. That's helpful. And then in terms of there was a disclosure in the 10-K about your sourcing, it looked like there was about a 900 basis point swing to North America in 2014 away from Asia.

That may reflect some of the temporary challenges you had, but is there a structural element there that could potentially change the gross margin structure going forward? How are you thinking about that?

That's just really part of our sourcing process. I think you hit on it, part of it was also just because of last year and some of the substitute product that we had to ship to other sources.

But this is just part of our long-term strategy of diversifying and ensuring the availability of our product and making sure we have enough resources out there that we're always looking at where the highest quality and best providers are around the world. So that's more of a natural, just the execution of long-term sourcing strategies for us.

We've shifted, some came back here, some went to Europe. It varies by category, so we're constantly out there looking and assessing new opportunities for source.

I would just add we're always going to be opportunistic and we really went back to 2012 levels. Obviously the strength of the US dollar presents opportunities when you look at manufacturing in Europe and even some other countries too.

So we're looking at all components. That's part of the relationship is it's about tender realization. We price our POs in dollars, as well as who can provide us with a quality and reliable source of the product.

Okay, thanks very much.

Our last question comes from Jessica Mays with Nomura.

Hi, good morning, thanks for taking the question. My question is on the real estate strategy. I was wondering if you could tell us on the remodeled stores, any change in the performance you've seen post remodel or relocation versus before? And then any further metrics. You said that your new store openings have performed higher productivity, but any more color you could give us around that?

With the new, we're looking at those. We'll have a chart that we'll put out when we go to the Raymond James conference next week. The new stores are outperforming the historic model by anywhere from 15% to 20% on the top line.

In the early parts of that first year it can be more significant than that, and then it narrows with the maturity. And we expect that to continue to narrow somewhat, but still to maintain the advantage. There's a slightly greater investment in inventory and in fixturing than we had had in the past, but the overall ROIC has improved.

In the remodel and relocation, we're still assessing which one is more powerful. There are times when we're leaning more towards relocation within the primary trade area. But we're really moving from DF sites to BC sites, looking for more retail-centric areas of the marketplace. Depending on how different a spot you're coming from to where you're going to, it may favor relocation over remodel.

We're not going to be able to offer any metrics because the sample isn't just quite large enough there yet. But from what we've seen looking at it in its totality, we're pleased with the performance that it's had and the ROIC we've gotten out of them, whether it's remodel in place or relocation.

Thanks so much.

Thank you, operator. I want to thank everyone again for joining us. We are a committed and determined team. We are excited about the year ahead and what we plan to accomplish. We look forward to speaking with you again in April to update you on our progress.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.