LL Flooring Holdings Inc (LL) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators fourth-quarter and full-year 2015 earnings call. With us today from Lumber Liquidators is Mr. John Presley, CEO, and Mr. Greg Whirley, CFO.

As a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission from the Company. I would now like to turn the call over to Steve Calk of FTI Consulting. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us.

Let me take a moment to reference the Safe Harbor provisions in the US Securities Laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties including the future operating financial performance of Lumber Liquidators. Although Lumber Liquidators believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those in the forward-looking statements are included in Lumber Liquidators filings with the SEC.

The information contained in this 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 am pleased to introduce Mr. John Presley, CEO of Lumber Liquidators. John?

Thank you, Steve, and good morning, everyone. Thank you for joining us for our fourth-quarter 2015 earnings call. We have a lot to get to today. But as we begin let me address the recent CDC report.

We believe there was substantial confusion in the marketplace after the CDC updated its report to correct an error in its calculations. The facts are as follows.

First the CDC report only deals with laminate flooring imported from China, which we have not sold since May 2015. Second, the report did not speak to any products that Lumber Liquidators currently sells. Third, and perhaps more importantly, the CDC has not recommended that customers replace this laminate flooring, and has indicated that their recommendations will likely remain the same despite their calculation error.

For those of you who are new to Lumber Liquidators, let me give you some background. We were founded over 20 years ago and expand our business from one store in Boston to more than 370 stores across North America. The fundamental factors behind this success are simple. By focusing on wood flooring, and building a strong business model, we were able to provide great wood at a great price. And because we were focused, we were also able to offer two things than made us particularly unique.

We offer a much greater selection to our customers, and we brought expertise at the store level that helped our customers with this very important purchase decision. Despite the challenges we have faced, particularly during this past year, our core business model remains intact and our perseverance and commitment to our business has never been stronger. That was one of the reasons I was so motivated to move from the boardroom, where I had been for a decade, to the management ranks back in November. And is why I'm confident in our ability to address our legacy issues and return the Company to growth and profitability.

Greg will provide you the details but let me hit on some key points from the fourth quarter. We continue to feel the impact of disruptions in the business. But we saw some positive signs, as well.

Q4 revenues were down 13.7% versus Q4 last year to approximately $235 million. We believe this decline is directly related to the stories in the media last year, and the resulting reputational impact that continued throughout the year. In light of this we're aggressively moving forward with initiatives to communicate the value proposition of our products to our customers.

On the cost side, the big event this quarter was the right down of the laminate source from China. Let me provide some context for this decision. As you know on May 7 of last year we suspended the sale of laminate products source from China, removing the product from our shelves. As we previously disclosed, this inventory has remained in storage as we have evaluated alternatives for the disposition of these products and the potential implications these alternatives would have on our business.

Since becoming CEO I have been squarely focused on strengthening Lumber Liquidators across every area of the organization and improving our performance. In my role I've seen firsthand the distraction this product causes our employees and the burden it puts in our distribution chain, especially since we are now fully meeting customer demand for laminate through approved alternative sources.

We also believe that selling this product through our retail stores in the near term would unnecessarily pressure our reputation and create ongoing distractions for our customers. As such, we have determined not to sell our inventory of laminate flooring sourced from China in our stores. From an accounting requirements standpoint this means we reduce the carrying value of this product and related moldings to net realizable value of zero, resulting in a charge to cost of goods sold of approximately $22.2 million in the quarter.

I want to be clear, that the write down of the inventory was not a determination as to the quality or safety of this product, but rather a reflection of our desire to move the Company forward and protect our brand. So, excluding that one-time item gross margin was 32.4% in Q4, an improvement compared to Q3 of this year and a decline compared to 39.2% in the year-ago quarter.

Notably, merchandise margins were slightly higher on a sequential basis, driven primarily by smarter pricing. So, our plan to be more strategic about pricing has had a positive effect, as has the simplification of our product line, both of which we talked about last quarter. In addition, the clearance pricing associated with the product simplification is behind us. We still have a ways to go but we're making progress.

To that end, I want to express our excitement about the appointment of Dennis Knowles to our leadership team as Chief Operating Officer. Dennis joins us with more than 25 years of leadership experience in store and business operations, and previously served as Lowe's Chief Store Operations Officer. He will be responsible for all functions in support of Lumber Liquidators store, network and business operations. We look forward to benefiting from his contributions and we will welcome him to the Lumber Liquidators family.

As it pertains to our legacy non-operational issues, in October of 2015 we announced that we had reached a settlement with the Department of Justice relating to the Lacey Act. The DOJ made that official a few weeks ago. We remain focused on resolving all outstanding legacy issues and we're working hard to make that happen.

As it pertains to our sourcing capabilities, we've made progress towards building a best-in-class compliance program. Since her appointment as Chief Compliance and Legal Officer Jill Witter has been systematically reviewing our compliance practices from top to bottom. She has already strengthened the program, which we believe, when fully implemented, will be one of the strongest and most comprehensive in the industry, not just the policies, but the way we follow and measure ourselves against those policies from the forest all the way to the store.

These steps and others are helping us rebuild trust with our customers. Customers are still coming into our stores and we have received positive feedback in customer reviews. I am confident with our focused plan, solid execution and talented employees we can successfully drive Lumber Liquidators forward to enter our next phase of growth and success.

I'll come back and talk in a few minutes but first let's hear from Greg who will discuss the quarter in more detail. Greg?

Thank you, John, and good morning, everyone. Today I'll provide details on our results for the fourth quarter and full year of 2015. Note that unless otherwise specified my references to percentage and basis point changes are in comparison to the prior-year period.

For the fourth quarter net sales were $234.8 million, representing a decrease of $37.2 million or 13.7% over the prior-year period. Within our comparable stores, net sales for the quarter decreased 17.2% due to a 15.6% decrease in the number of customers invoiced and a 1.6% decrease in average sale. Non-comparable store net sales increased $9.6 million.

We believe these declines were directly related to the stories in the media over the past year and the reputational impact related to products which we no longer sell. As John mentioned, we're aggressively moving forward with initiatives to communicate the value proposition of our products to our customers. We're also taking another step forward to move past these legacy issues with our decision to write down the Chinese laminate inventory.

During the fourth quarter we also saw a few encouraging trends. We were able to restore our stock of laminate inventories using alternative suppliers from North America and Europe. As a result, laminates as a percentage of total sales grew sequentially in Q4 and represented approximately 16.2% of our sales mix in the period compared to 13.3% in Q3.

We are also working hard, as we discussed on our last call, to be more strategic in our promotional strategy. Based on early results we believe our customers continue to respond to our promotional efforts and our simplified assortment in a good-better-best format.

Finally, as part of our plan to engage the do-it-for-me customer more effectively, we increased our focused on installation. As a result, in the fourth quarter, installation sales increased to $10 million compared to $5.8 million in the prior-year period.

Turning to our store network, we have significantly limited new store openings as we focus on improving the performance of our existing locations and strengthening our core business. That said, we did open five stores in the fourth quarter and expect to open up to three stores in the first quarter of 2016. The majority of these stores increase our penetration in existing markets. We will selectively evaluate store openings in 2016, but, again, we are focused more on improving our existing store performance.

Now let's look at gross margin, which came in at 23% in Q4. During the quarter we determined that we would not sell our current inventory of laminate product sourced from China in our stores. As a result of this decision, we recorded a lower cost-to-market adjustment to reduce the carrying value of this product and related moldings to its net realizable value of zero, resulting in a charge to cost of goods sold of approximately $22.2 million. Excluding this lower of cost-to-market adjustment, gross margin in Q4 was 32.4% compared to 39.2% in the prior-year period, and an increase sequentially compared to Q3 gross margins.

We told you last quarter that we plan to be more strategic and selective in our promotional cadence. We began that process in Q4 and, on the whole, realized pricing increases of about 100 basis points for the quarter compared to Q3. We are encouraged with the outcome of these efforts, and in, in that vein we will continue to monitor the effectiveness of our pricing strategy at the store level and adjust accordingly.

Moving on to year-over-year comparisons, although we were more strategic in our promotional strategy sequentially, our retail prices remained low on a year-over-year basis, which continued to negatively impact our gross margin. Gross margin was also impacted by costs associated with changes to our sourcing related to our laminate product category and, to a lesser extent, higher transportation costs.

Turning to SG&A, SG&A expenses for Q4 increase by approximately $7.7 million or 9.9% to $85.5 million. As a percentage of net sales SG&A increased to 36.4% from 28.6% during the prior-year period. When excluding $6.5 million in legal and professional fees and related accruals connected to our defense of certain legal and regulatory matters, SG&A expense increased by 1.5%.

Within our SG&A, advertising expenses came in at approximately $16 million, 8% lower than the $17.4 million in the prior-year period but approximately 40 basis points higher in terms of percentage of net sales year over year. Additionally, occupancy costs of $11.4 million were roughly consistent with the prior-year period, and as a percentage of net sales increased by approximately 70 basis points to 4.9% due to lower net sales year over year. Our net loss was $19.8 million or a loss of $0.73 per diluted share based on approximately 27.1 million weighted average diluted shares outstanding.

Now I'd like to summarize our results for the full year. Net sales for 2015 decreased by $68.6 million or 6.6% to $978.8 million, with non-comparable stores adding $47.6 million, which was more than fully offset by the decline in comparable stores of 11.1% or $116.2 million. This was driven by an 8% decline in the number of customers invoiced and a 3.1% decline in average sale.

During 2015 the Company reduced the selling price of its products on average by 6%. These price decreases applied to most of our products and were in response to negative allegations impacting the Company's reputation. Gross profit in 2015 decreased 33.3% to $278.9 million from $418.2 million in 2014.

We attribute this decline to a number of factors primarily resulting from changes in the Company's business in response to allegations impacting our reputation. These include certain planned reductions in retail prices implemented in late 2014, and greater promotional pricing beginning in March 2015 to drive customer traffic and reduce inventory. Costs of $9.4 million related to the Company's indoor air quality testing program and the LCM adjustment related to the previously discussed Chinese laminate products, totaling $22.5 million.

Turning to SG&A expenses, SG&A increased by 15.3% to $362.1 million in 2015 compared to $314.1 million in 2014. Notable items impacting SG&A include: $23.8 million in legal and professional fees related to our defense of various legal and regulatory matters; $13.2 million associated with the DOJ settlement related to Lacey Act compliance; $5.3 million in incremental expense related to employee retention incentives; and $4.3 million in asset impairment charges related to the discontinuing of certain non-core investments.

Operating income for 2015 decreased $187.3 million to a loss of $83.2 million from $104.1 million in 2014. Operating income as a percentage of net sales was negative 8.5% for FY15 compared to 9.9% in 2014. The effective tax rate for 2015 was 32.4%, down from 38.8% in 2014. Net loss for the year was $56.4 million, a decrease of $119.8 million compared to 2014.

Turning to our financial position, liquidity and capital resources. Cash and cash equivalents were $26.7 million at the end of 2015 as operations for the year produced $9.2 million, and capital expenditures were $22.5 million. We had $20 million outstanding on our asset-based revolving credit facility at the end of the year with $67.2 million available under this facility. During the first quarter of 2016 we borrowed an additional $10 million against our asset-based revolving credit facility to fund additional inventory purchases in advance of the higher volume spring flooring season.

Merchandise inventory was $244.4 million, including the previously discussed adjustment to the value of laminate source in China. This amount was down from $314.4 million as of December 31, 2014. Available inventory per store was approximately $577,000 as of December 31, 2015 down from approximately $756,000 at the same time last year, and below the September 30, 2015 level.

Given uncertainty related to customer demand, our long purchase cycle, and outstanding legal and regulatory issues, we're not able to provide an outlook for 2016 at this time. As we look forward, we remain focused on improving the parts of the business that are within our control in order to rebuild our brand and drive improved performance in our core business.

I believe we're making the right decisions and instilling increased accountability and discipline across all levels of the organization. We believe that if we can execute on these strategic initiatives we can strengthen the business, reinstate the value of our brand, and improve our financial results in 2016.

I would now like to turn the call back over to John for his closing remarks

Thanks., Greg. The team and I have taken the last few months to both build assess where we are and lay the groundwork for a healthy 2016. As we see it, there are four main areas which we believe solid execution will get us back on track and growing again.

Operationally, the number one place where we can make a difference is in store performance. Here's what I mean by that. Our store model is right. The customer gets much wider selection at a much better place.

While our individual stores are profitable, and the model has worked for us, it is clear to me we're missing opportunity to close sales at the store level. Part of our historical value proposition has been our stores' ability to interact with the customer in an appealing environment, provide advice about style, type and performance specifically tailored to each customer's need. This is critical to attracting customers as well as closing sales. So, we want to ensure we are delivering on this priority as we move forward.

While I'm on this point, we are extremely pleased to have someone of Dennis's caliber joining our team. And I believe his store operations and home-improvement expertise will position us to deliver even better service to our customers and drive value for all of our stakeholders.

We are also executing a number of initiatives, one of which is sales training to help deliver improved service to customers. This isn't about pressure sales or ploys to get the customer to do what you want. This is about helping the customer get what they want. And that is a skill, actually an ethic, that all our associates want to embody.

We've also been refocusing on our compensation structure for our store personal. The old system was complex and confusing to our associates. We have simplified that system with an increased focus on driving higher gross-margin dollars.

Those are just two examples how we are focusing on the individual store performance, and there are more. The thing I want you to know is that when we communicated to our associates at Lumber Liquidators University a few weeks ago, the response was an overwhelming yes. Our people have craved accountability. They have missed the pride they use to have in their Company, and they are freshly motivated to drive our transformation to a better Lumber Liquidators. I could not be more pleased with the response and I join them with that fresh enthusiasm.

The second area of focus is to strengthen our value proposition. Historically, Lumber Liquidators has posted impressive growth, in part because of our wide product selection. We spent the last half of 2015 reviewing our product assortment and assessing the right mix of products in the store so that customers would have clearer options to consider.

But perhaps a more important element of our value proposition is the knowledge base of our store associates. For instance, we know from customer feedback that we're one of the few places you can go to get clear, informed advice about the flooring you're going to install in your home, flooring you will be living with for many years.

Over the last few years I believe we have lost focus on this critical element of customer engagement. So, when we held our Lumber Liquidators University, we were all about training. Training on the products we sell, on the rooms and homes where these products perform best, and how to help customers make the best decision possible. Yes, customers appreciate our wide selection and prices, but our true value-add is that customers know that their money is invested in a product that will serve them for many years to come.

A third area where we will be relentless in 2016 is in responsible sourcing and compliance. As I have mentioned our goal is to have such a robust system and reliable accountability that we can source from anywhere, anytime, the right way.

One of the provisions of the DOJ settlement is that we are required not only to strengthen the compliance we have in place but also to add audit procedures to ensure we remain diligent. And with the leadership of Jill Witter and the commitment our management team we will be.

We're also requalifying every vendor we do business with to ensure maximum quality of sourcing throughout the world. Our customers deserve this attention to quality as do our employees and our shareholders.

The fourth area where we see real opportunity is in opportunistic expansion of our business. The primary component of that is a renewed emphasis on installation. If you have followed us for a while you know that the consumer market consists of the classic do-it-yourself customer and the do-it-for-me customer, those that value professional installation.

Historically we have been geared toward the do-it-yourself customer but we know there is still significant opportunity in the professional installation, which calls for affordable, convenient installation services. In Q4, we increased our focus on coordinating these services and saw our installation revenue increased 73% quarter over quarter. The numbers are small at this point but we are pretty excited about our trajectory in this space.

So, those are the four broad areas in which we see the best potential and for which our focus will be in 2016. Our management team is very confident in the potential of our core business model as we move forward. We believe we will achieve serious progress in rebuilding customer trust and the underlying value of Lumber Liquidators.

I also talked last quarter about discipline in controlling costs. That is an exhaustive process, as you might expect. But we made progress in SG&A and other parts of the business. The discipline is paying off and as we have been evaluating all expense lines and been diligent about where we spend.

As we close, I want you to know that this team is aligned, we're motivated, we have a business model and a plan that works. I believe we can make good progress in 2016 as we stay focused and stay on a mission.

With that, operator, we're now ready for questions.

(Operator Instructions)

Budd Bugatch, Raymond James.

Good morning, John. Good morning, Greg. This is David on for Budd. Thank you for taking my question.

Could you describe in a little bit more detail some of the initiatives you're taking to communicate the value proposition and how it's going to change going forward versus what it was in the past?

Yes, Dave, thanks for the question. It's really not changed a lot from the past. It's just more emphasis on what we're doing out in the stores. I think with the negative publicity that we've had over the past several months, we just had to get better at the front line in the stores of engaging our customers.

So, we've really tried to focus on training, conversion of sales, giving the customer the advice that they need. It started with Lumber Liquidators University in some of the training that we did there. So, it's really, I would say, more focusing of getting back to the basics of giving the advice to the customers coming into the stores that they need, along with the price and along with the selection that we offer.

Okay, thanks. And also, moving on to the gross margin line, I was wondering if you could give a little bit of a walk there on what the impact was from lower prices, transportation year over year during the quarter?

Sure, this is Greg.

When you step back, again, the biggest impact for the quarter was with respect to gross margin and then price. We are still trying to, as we mentioned before, be more strategic in our pricing, but doing so it's going to take a little bit of time to build back to the prices that we'd had before.

I'll just remind you, though, that we've got a strong business model in place. The directives that John mentioned, we expect they will help us lead our return as we move forward. The improvement's not going to happen overnight, but we think we're making the right choices right now that will help us.

As we talked about, when you look at fourth quarter compared to third quarter, our pricing strategy, the one that we talked to you last quarter, has helped us improve by 100 basis points compared to third quarter. And we think that's the right thing to do. We're going to focus on our sourcing. The returns from that are going to take some time, but we expect to see it as we move forward. And the good-better-best pricing format that we put out is resonating with our customers and with our associates. They understand it and we're selling in that line.

Okay. And last question for me and then I'll cede to the rest of the queue, what quarter did you take the $4.9 million reserve estimate for anti-dumping and countervailing duties?

Off-the-cuff I believe that would be second quarter of this year.

Okay, just checking on that. All right, thank you very much.

Dan Binder, Jefferies.

Yes, thank you.

My question is really two parts. First if you could speak to the cadence of the quarter and what you've seen since this second or third airing on 60 Minutes. And then maybe if you could just speak to any color you can give us around how sample requests are looking year over year currently.

I'll start.

Again, I think we have a strong business model in place. Our stores are staffed with a knowledgeable team that can best support our customers and execute on that value prop. We intend to invest in them. And I'm actually excited to see what Dennis and that team will produce as we move forward this year.

We do think we're making the right decisions, though, to improve sales. We've got a full assortment of laminates available. As I talked about just a minute ago, that good-better-best pricing strategy, we think, is having a positive impact. And we're going to continue to promote our products. We think our promotions are helping us drive traffic into the stores.

As you look at the cadence during the quarter, the first half of the year, the first half of the quarter was better than the second half from a comp perspective. But I will remind you that last year this time the Company went on a different pricing strategy, a different philosophy. We lowered our prices in order to drive more significant traffic. We didn't follow that same path in 2015. So, that's some of the reasons for the change over the quarter.

I'd just like to add to the first part of your question, the latest bit of publicity. All I'll say about that is I'm extremely pleased with how our stores and all of our associates handled this latest round. They stepped out with a degree of professionalism that I've not seen many times in my career, and really worked hard over the last week to serve customers and answer questions that were obviously generated by this.

As it relates to cadence in the current quarter, as you know, this quarter is not over. March is always an important month for us as we enter into the spring selling season. We're not commenting as to what we've done so far this quarter, because we have a very important month left ahead of us.

And then just, if I could, a quick follow-up -- you did say you plan to expand with, I think, up to three stores in Q1. Any additional color on net store openings for the balance of the year?

At this point what we're looking to do is focus on our current store base. We believe that there is opportunity for us to work in our existing stores. We won't shut off new store openings, but the expectation is that any stores that we do open in 2016 are going to have to pass what we considerer a pretty high hurdle for us to open.

Okay, great. Thank you.

Matthew Fassler, Goldman Sachs.

Thanks so much and good morning.

My first question relates to your thoughts on ultimate cost of goods as you implement some of the sourcing changes you've made, whether it's sourcing of laminate, thinking about some of the duties and other ongoing regulatory dynamics in the space. I'm also just thinking about where any of that higher-priced product or higher-cost product might be in the supply chain. Obviously you have booked those higher costs as you sell them through. And also, by the way, if there are any offsetting impacts that might help enhance your gross margin and offset some of those sourcing dynamics.

Thanks, Matt. You're right, there's a lot moving in the margin, we've got a lot that we're going on. But as I step back, again, and think of where we are, we are in a position right now where we are working to improve our sourcing capabilities, make sure that our compliance is second to none. And in doing that, that will allow us to source from anywhere.

So, if you step back and say, where are we today, certainly we've got products, excluding laminates, that are in the queue that are higher cost than maybe what we had a year or so ago. But as we step back and think through it, the sourcing initiatives, we expect that there will be a return from that in the future. Again, it's not going to be immediate, but we're expecting to see a return.

So, where's the top? It's hard to say. We certainly don't believe right now that we'll return to the 40 margins that we have had in the past. We don't need to be. We think that we can do just fine at slightly lower.

And if you think about pricing and promotion, it sounds like you've decided to move to a somewhat less promotional cadence than you had been at. If you think about the promotional cadence in Q4 relative to what you view as sustainable, would you say that you would get more promotional in the future? Or would you say that you've pulled back to the degree that you will?

Obviously, I know there's incentives to try to continue to drive traffic and reinvigorate the franchise. I realize you think you can get higher than the 32.4 that you reached on an underlying basis, but is the pricing and promotional component of that, in your view, at a baseline level?

It's a difficult question to answer, but one that we'll obviously owe you a though ton it, and we'll give it to you. And it's this. We are working very hard on our pricing. The strategy that we put in place and talked to about in Q3 is seeing some improvements. Those improvements are going to take some time.

Where is the top? We don't know. But what we're looking to do is make sure that we're continuing to monitor what happens with respect to traffic in relation to our pricing. And we're going to be smart about how we do it, how we adjust prices going forward. Again, we think there's more room for us to move, but where that stops we'll need to keep continuing to evaluate it throughout the quarter.

Matt, I would add that promotional pricing is always going to be part of our business to drive traffic. What is different today, a couple of things that we think will have a positive impact on margins going forward. One is the segregation of our good-better-best pricing to give our associates more options in which to give our customers, and our customers more options in which to buy. That is also supported by our new incentive plan, which drives, we think, better behavior towards higher margins.

And then the other thing that we've implemented that we're seeing some effect in the fourth quarter is discipline around pricing and discounting at the counter. So, we believe those things in the front line will help margin going forward, as well as all of the efforts that Jill and her team are doing to make sure we can source from anywhere in the world.

I think Greg is right. I don't know that we'll return to the 40% margins, but we're optimistic that there's some upside from where we ended up in the fourth quarter.

And then my last very quick question, hopefully of broader interest, you gave us two expense items -- the advertising and occupancy. There are two others that are significant. Just want try to understand where they were. There's the payroll piece and the other expenses and cost piece, and, frankly, that would be the one of greatest interest to us.

You talked about the increase in year on year related to some items. Any breakout would be super helpful since we've all modeled the business in the past.

Sure. Again, what we tried to do in calling those out is to give you some of the unusual items. Payroll for the quarter as a percentage of sales is roughly 14%. And I can't remember what other one you just asked for.

There's what you used to call other expenses and costs, which a year ago was $11.4 million. I know the legal would be in there. But if you have the totality of that number, if you're still thinking about it in that way.

We can try and get that for you and hand it out, but I don't have that number handy. We're, again, right now focused on making sure that we're controlling all costs across the chain, or across the income statement, and really just focused that way. It's hard to pull it out. What we were trying to do is highlight those one-time items.

Thank you so much.

Simeon Gutman, Morgan Stanley.

Good morning. This is Joshua Siber on for Simeon. You mentioned that you're missing an opportunity to close sales at the store level. Just curious how you diagnosis this and how much of it is related to salespeople's ability to provide POS discounting.

Yes, I'll address that, Greg, first. You may want to jump in. How we identified it, we know we drive a lot of traffic in our stores. And we've done that historically. We're still seeing that traffic come in, we're still seeing the traffic on our web sites, and we're still seeing the traffic on sample requests. So, we know that our marketing and our advertising works to drive traffic.

We've spent a lot of time out in the stores. We see the traffic coming in. And we believe that -- and with the negative publicity and relatively high turnover that we've had over the past year or so, we believe there is opportunity with new associates and older associates to refocus on the core of the buy side of our business.

We believe that in the past we've had tremendous opportunity to drive sales through that traffic coming into our stores. Maybe in the past we've not had to be as good at conversion and as good at closing as we need to be today. We're under a little bit more scrutiny.

So, we've really stepped back and focused on the training aspect. We've tried to be focused on the incentive plan and the compensation plan. And we've also focused on -- and we have a task force out there today that have identified a number of our stores that, for whatever reason, are not performing up to the historical standards. That task force is out working with the regional managers on a specific store level to find out what's going on in that particular store and fix it.

It's really more of a function of realizing the time we're in, the scrutiny we're under. And when you're under this type of scrutiny you have got to be better at what you do. And we think we're making great progress in doing that.

Okay. My follow-up related to that is on turnover. How are you managing employee retention and how is turnover trending over the last few quarters?

Turnover last year was higher than we wanted. As we mentioned in last quarter's call we had a monetary retention plan in place. We think that that has done well with most employees.

What we're really focused on in 2016, and it started in January at Lumber Liquidators University, was now we're going to really attack the culture, really attack who we are, who we are trying to be, who we want to be going forward, and what kind of company we're going to be, and create culturally a place that people are proud to work. So, it's less about monetary in 2016, it's more about creating the culture of Lumber Liquidators and who we're going to be as a company, as an employer, going forward.

The feedback we've gotten so far has been incredibly positive. We're talking to our associates out in the stores a lot. We hear from them. We think our enthusiasm out there, right now, is not as high as it will be, but it's certainly on the mend, it's certainly building. And I'm pretty enthused about that.

Okay. My last question is related to the spread between the best-performing stores and the worst-performing stores. Is there anything that explains the difference between the group?

We're obviously working very hard to understand that. A couple of things that I'll share with you. One, on a four-wall basis, basically all of our stores remain profitable. We've obviously been dealing with a lot of unusual items, unusual expenses, during the year.

Certainly certain markets are performing better than others. That could be a function of just those environments, different parts of the country seeing better economic conditions, that sort of thing. But, as a whole, all of our stores are profitable. We continue to believe it makes sense to invest in our store base, and our employees, specifically, in our store base.

And I'll follow up on one thing that John started to touch on, and that's, when you really step back, I want to highlight for you that we believe one of the reasons that we can -- and John's first point of focusing on execution in the stores -- one of the reasons we believe that will work is because we know we've got the best team out there supporting our customers. The team that we have out in the field, the guys in the stores, know our business, they understand it. And while we've had some turnover we still believe we've got the best team and we're going to invest in them to make that a strength of the Company -- better strength of the Company as we move forward.

Okay, thank you very much.

Oliver Wintermantel, Evercore, ISI.

Good morning. How should we think about working capital dynamics in 2016? It looks like 2015, inventory was a big help to working capital, so just wanted to see the dynamics in 2016 as you see it.

Thanks, Oliver. We believe we have the liquidity necessary to operate the business and effect a turnaround for the Company. As John mentioned, we're going to be focused on store performance as well as our value prop for the customers. Those are just a few of the things that we're working on.

But know we understand that, as we are working to fix the top line we have to manage our expenses. That's going to take us some time, but we are spending more wisely. And I'll highlight a couple of things for you. First we're focusing on our existing stores, which we've talked about before, and less on new store expansion right now. We believe it's going to benefit us.

And, as I said, I won't commit to no new stores, and, in fact, I did refer to a couple that we opened in Q1. But any new stores that we open are going to have to pass a high level of scrutiny. The idea here is, again, in 2016 we're going to make sure that we are managing our expenses to keep the liquidity equation equal for the Company, or at least on the positive side.

Thanks. And do you have a CapEx number for 2016?

I think we gave out somewhere between $10 million and $20 million.

Got it. And just, lastly, on the revolver details with your asset-backed revolver and the write-down of the inventory, does that have any consequences on the revolver?

A couple of things I'll point there. We have had, as of the balance sheet date, roughly $67 available under the revolver. The write-down of the Chinese laminate didn't have an impact on that $67 million.

And I will note, just for full clarity here, we mentioned that in the first quarter we borrowed an additional $10 million to fund inventory purchases. So that availability would be about $57 million through today.

Okay, thank you very much.

Seth Basham, Wedbush Securities.

Thanks a lot and good morning.

My first question is around trends on returns and cancellations. Is there any color you can provide how those trended sequentially from Q2, Q3, Q4 and into the current quarter?

Sure.

With respect to returns and cancellations, if you're looking at the year 2015, obviously the farther this Company gets away from the original 60 Minutes article, the less of an impact it had on our business. Right after the event happened, we saw higher amount of returns and cancellations.

As you might expect, there's a lot of confusion around our products. And I guess I'd stop there before we finish even answering the question. There's been a lot of confusion around our products, and I think John mentioned it. The questions around the CDC, the CPSC are unrelated to any of the products that we sell currently.

So, when we sell to our customers they understand today what they are buying. They're not buying products that are being questioned in any sort. And they're getting a great value. So, we have seen a decline compared to earlier 2015 with respect to customer returns.

Got you. And over the course of the past week after the recent airing on 60 Minutes, have you seen another jump in returns and cancellations from the trend earlier this quarter?

It's hard to say after one week of time. We've had a lot of interest, certainly, customers calling in trying to understand what it means. I think you've seen some of the advertisements that we put out with respect to trying to help explain for our customers what the CPSC or CDC's report really meant.

We emailed all our customers, and did that. And then over the weekend you probably saw that we had some specific newspaper articles taken out, again explaining the Company's value proposition, explaining our brand. But that wasn't done in response to concerns about returns. It was done because we felt a need to alleviate concerns related to our customers and help with the confusion that's out in the marketplace

Okay, fair enough. I know you don't want to give specific numbers, but can you provide any trends on open orders or anything like that to give us a sense of how the business is moving?

Open orders are difficult because of the long period and long cycle that we've got. We typically don't go into that measure. Again, as John mentioned, we continue to see people coming into the stores. But March is really the key month for the first quarter. It's really the start of that spring selling season, and so we're working hard to make that as good for the Company as we can.

Okay. And then my final question is, you've taken a number of accruals for potential unexpected legal and regulatory issues. As you think about the balance of the year from a liquidity standpoint, do you have any contingency plans should you have to take additional accruals?

I mentioned some of that before. Accruals don't, as you know, directly equate to cash. But your point is well taken. We've got a number of things out there and we're focused on our liquidity going forward.

And the things I mentioned before what are really going to help you, we think we've got the liquidity right now to run the business, and work through those issues. We talked a little bit about store openings. We're cutting back the new store openings to really focus on our core right now.

And I will mention we're not going to be able to generate cash the way we did in 2015 from inventory reduction. This Company is focused right now on profitable sales. But, yes, we are working on contingency plans to make sure that, in the event sales don't come in as we would like, we're managing the other side of the balance sheet or income statement, as well.

All right. Thank you very much

Peter Keith, Piper Jaffray.

Good morning, John and Greg.

I was curious on the management positions. With the hiring of Dennis that was announced today, do you have other areas within the organization that you're looking to hire people into?

Thanks for the question. First of all, we are extremely excited about Dennis coming in. I think I mentioned last quarter that store operations was someplace where we needed to fill in in the organization. It's a position that we identified early on as I came in as something that we needed to consolidate and meet.

So, we stated a search back in November for that position. It was a nationwide search. We looked for and talked to a number of different candidates, and we just feel very fortunate that somebody of Dennis's caliber and background in the home improvement industry is going to join us.

That was the major position that we're looking for. We feel like that addition really strengthens our management team. We feel very good about the management team that we've got in place. We talked in the third quarter about making sure that we had the management team in place to make sure that we had strong succession plans going forward, and we think we've made progress on it.

So, we are very pleased with this move. It doesn't mean there may be other moves that we might make in the future, but for right now we think this was a very good move for the Company. We're very excited about Dennis being on board and we will go from there, if you will.

Okay, thank you. And then following up on some commentary around gross margin, Greg, to the best of your ability, outside of maybe some regulatory decisions, it sounds like gross margin is effectively bottomed out from the various initiatives around pricing clearance. Is that the right to think about -- that what's in your control sequentially you think gross margins would slowly get better?

That is what we're driving for, again with the expectation that we are going to be pricing more effectively and strategically. That will help us on the top line. And then we are looking to manage through those costs on the bottom line, as well. That's our goal. We are going to drive profitable sales in 2016.

Okay. One last question, just regarding the test kits that you had commented on in previous quarters. I was looking at the 10-K that was just filed. It didn't look like there was any increase in the number of kits sent out. But a question regarding the various phase one, two and three levels, there is no reserve for phase three. But I was curious if you have had people reach that phase three where you have paid for their flooring replacement, if there's a number, that you could quantify it for us.

We have no reserve for phase three. We're required under the accounting rules to essentially evaluate any past occurrences of payments to people, and that would drive how we look at the future. So, in that, I would tell you the there have been no expenditures related to the phase three portion of the test kit program to this point.

Okay. Thank you very much for answering my questions. And, John, I certainly wish you a speedy recovery.

Rck Nelson, Stephens Inc.

This is Nick Zangler in for Rick.

Just quickly, regarding the findings and recommendations we have here from CDC, do you see these having any impact on any decisions from CARB? I know you've maintained that you've always been compliant with CARB, but are we waiting for acknowledgment from them? Are they running their own tests? And should we expect an update from them anytime soon?

We are still working diligently with CARB towards a solution. We are cooperating with them fully and those discussions are ongoing.

And then just curious, hoping to get an updated snapshot of product mix. You said 16.2% of mix is coming from laminates from alternative sourcing. Can you provide the remaining profile, just to see where we are at and how things have changed?

Generally, I think the way to think about that as you look forward is to think about it in the context of how we were in 2014 and 2013. 2015 is a little bit of a different year, as you might expect, because of the suspension of the Chinese laminate for a significant portion of the year. We have seen an increase, as we talked about, in our installation business as a percentage of our total sales. But on the whole, from a product category standpoint, I think the best way to think about it is in the context of what we did in 2013, 2014.

And then, quickly, at the peak, if you have it offhand, what percent of sales did Chinese laminates represent -- at its height, I guess?

I don't have that number handy, but I think 19% to 20% is a reasonable number to use, Again, to clarify, I wouldn't say at its peak just Chinese laminate. The laminate category that we had before would have been 19% to 20%, not necessarily just Chinese laminate.

Okay. And that's down to 16.2% now.

That's right.

Got it, great. Thanks very much. Appreciate it. Good luck.

John Baugh with Stifel.

Thank you. And, John, best of luck.

Quickly, anything else -- you mentioned laminate costs are up year over year -- are the costs of engineered wood or any other products up year over year due to increased compliance or sourcing changes?

It's a good question. Again, stepping back, as we look at our cost structure, one of the things that, obviously, has been related is compliance, as you noted. Our compliance costs are going to be a little bit higher in the short run, but what we're expecting long term is that we will be able to source product from anywhere.

And with the ability to source product from anywhere, we don't really have an expectation that we have to have no return on that investment. We believe being able to have a best-in-class compliance program is going to be beneficial to us in the long term.

Specific products in terms of costs, that sort of thing, is somewhat difficult to do. It depends on where we're buying product from, and that. But on the whole, the biggest moment you should be aware of was the difference between the cost of Chinese laminate and where we're now sourcing it.

Thank you. And then just quickly, LVT, could you comment on how much that is of your mix currently, roughly, plans to grow it? And does it increase or decrease average ticket? Thank you.

We're not going to comment specifically on the percentage of LVT product. We're certainly looking at that product as it seems to be a hot part. Vinyl within our mix is actually growing. But we are seeing some increases in mix from vinyl as a portion of our whole. Where do we see that? We're obviously going to be working very hard with our sourcing and merchandising teams to make sure our stores have that product to sell.

Thank you. Ladies and gentlemen, we have come to the end of our time for questions. I'll now turn the floor back to Mr. Presley for final remarks.

Again, thank you for joining us on today's call. I want to thank our Lumber Liquidators team for your hard work. We couldn't do any of this without you. I also want to thank our customers for your continuing support. And finally on personal note, I want to say thank you for your encouragement and positive thoughts during this season. I'm feeling good, I'm optimistic about the future, and we look forward to speaking with you all again next quarter. Thank you.

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