LL Flooring Holdings Inc (LL) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lumber Liquidators' third quarter 2016 earnings call. With us today from Lumber Liquidators is Mr. John Presley, Chief Executive Officer; Mr. Marty Agard, Chief Financial Officer; Mr. Dennis Knowles, Chief Operating Officer; and Mr. Greg Whirley, Senior Vice President of Finance and Risk Management.

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

Thank you, operator. Good morning, everyone and thank you for joining us. Let me take a minute to reference the Safe Harbor provisions of 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 reflected 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'm 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 third quarter 2016 earnings call. I'm joined by Dennis Knowles, Chief Operating Officer; Marty Agard, Chief Financial Officer; and Greg Whirley, Senior Vice President of Finance and Risk Management.

Let me begin by reviewing our third-quarter operating and financial performance. Then I will update you on the strategic initiatives that we laid out earlier this year. In the third quarter, we reported revenues of $244.1 million, an increase of 3.4% compared to the prior-year period. Net sales from comparable stores increased 1% in the third quarter.

While we had a positive comp, it is important to note that our product mix was substantially different than it was in Q3 of last year. You may recall that in the year-ago quarter, we were still clearing out a variety of products, including tools and tile. In Q3 of this year, we were focused on our core product offering. The kind of mix we would expect moving forward.

We saw Installation Services were added to sales. We believe Installation Services helps us improve our brand and increases our access to a wider customer market. We feel we have made some directional progress on the top line. And we believe we are seeing some anecdotal customer feedback this year, indicating that the brand continues to improve.

This progress is consistent with the strategy we laid out earlier this year. And while I still see a lot of opportunity for improvement, we are pleased with the direction we were headed in relation to sales. Our gross margin, when adjusted for certain items, was up slightly compared to the year-ago quarter. Again, given that our product mix and pricing strategy were significantly different than Q3 of last year, we are less focused on the year-over-year comparisons. Marty will cover this more specifically in a few minutes.

SG&A still includes a number of incremental costs and we are providing additional detail for you as we have in the past. That said, SG&A was still higher primarily due to advertising, store operations, and staffing expenses, and corporate investments in several areas, most notably, compliance.

Consequently, we are reporting an operating loss of $24 million compared to an operating loss of $17 million in Q3 of last year. Our team is very focused on controlling these costs as we continue to build the right foundation for Lumber Liquidators.

On the legal front, Jill and her team are continuing to systematically address the legacy issues from 2015, including the DOJ and SEC investigations as well as the MDL. And while we still cannot provide specifics on progress or timetables, we will continue to do what is in the long-term best interest of our shareholders.

We are also continuing our improvements and responsible compliant-sourcing, both independently and in cooperation with regulators. This is has enhanced our ability to source product and I believe will continue to improve. We have introduced GreenGuard and FloorScore certifications, which provide assurance to our customers that our products meet comprehensive emission standards.

And as I mentioned last quarter, we were the first national retailer to commit to offer phyllite-free vinyl flooring. We are confident in the modernized compliance system we have in place and we will continue to make adjustments, as appropriate, to ensure quality and safety for our customers.

Finally, we have continue to build our core organizational capabilities. We have a new CFO, Marty Agard, who you will meet today. We have also added senior leadership in information technology, store operations, installation sales, and strategic initiatives. These are great complements to our team and will support sustainable growth of Lumber Liquidators in the future. Now let me hand it over to Dennis to provide more color on our sales performance and the progress we are making on our strategic initiatives.

Thank you, John, and good morning. We are encouraged by our comp increase in Q3 and I believe we're headed in the right direction. That said, we're not where we want to be and must be vigilant and continue to execute on the strategic initiatives we laid out earlier this year. These include: improving store performance, strengthening our value proposition to our customers, ensuring responsible compliant-sourcing, and expanding the business.

But before I update you on our work, I want you to know that there is another priority that informs how we execute on our initiatives. That priority is returning to profitability. We continue to assess our store-based selling resources and incentive structures to be as efficient as possible while delivering on our value proposition.

We are pursuing pricing, assortment, and sourcing strategies to drive gross margin while diligently optimizing the cost and effectiveness of corporate capabilities to reduce SG&A expenses as a percentage of sales. This focus on returning to profitability is our overarching mandate and is incorporated into all of our initiatives.

Let me update you on those now. First, we continue to focus on improving store performance. Flooring is a complex project, which makes interaction with customers critical. This makes our store employees one of the most valuable assets we have.

As we mentioned in Q2, we reviewed each store to ensure we had quality team members who are knowledgeable about flooring and available to serve our customers. At the same time, we focus on our training efforts this past quarter to ensure that we had our associates with the best product knowledge, sales expertise, and tools to enhance the customer experience.

In addition, we have evaluated compensation plans at the store level in an effort to provide a more balanced structure for our associates. I believe this will help us improve our ability to both attract and retain good talent across the organization. Our new structure has taken effect this quarter.

Our work on these issues is already having a positive impact. We have stabilized our workforce, we have significantly reduced open headcount and employee morale has improved across the network. We will continue to look for ways to support our stores and our store associates. And I want to personally thank each of them for their hard work this quarter.

Our second strategic initiative, strengthening our value proposition, requires integration and alignment across all operational areas. As we continue to work together across functions, we are better able to ensure we have trend-right products, where and when our customers want to buy them at a competitive price.

Since we specialize in one category, in wood and wood-look flooring, we simply have to be the best at that. We have to recognize that this is an important, long-term customer decision that needs input and careful consideration. But we also need to ensure we don't make the process more complicated than it needs to be. This was the basis of our good, better, best campaign.

We believe we have the best assortment in the market but we've also simplified the shopping experience for the customer. By the end of 2016, we will have replaced over half of our product with a fresh, contemporary line. Most of this assortment is in our stores today and customer feedback has been very positive. In addition to improving our merchandising assortment, we are building our inventory management processes so that our customers can get what they want when they want it.

For example, we have continued our efforts to improve the in-stock positions on key categories, like vinyl, engineered hardwood, and engineered bamboo. By increasing our reorder points on a few key SKUs, we strive to ensure that the product is at the store versus our distribution centers and are there when the customer wants to take it.

In all, we believe that improving the style and quality of our product has positively impacted our performance, both with respect to our financial results and our brand image. We also believe that our advertising approach has been effective as we continue to rebuild the brand from where it was in 2015.

Our third initiative is our continued commitment to safe, high-quality compliant products. This is a top priority for our senior team and our associates. We have strengthened our partnership and processes with key vendors to provide consistent and reliable products and have introduced certain industry certifications on newly-sourced solid products, including our proprietary Bellawood brand.

Finally, we are making progress in the expansion of our business, as evidenced by our performance in Installation Services. In Q3 of 2016, we grew both sales and job counts versus the prior-year quarter and sequentially. And we're making strategic investments in this area to better serve our customers.

As a reminder, we're not looking at these services to drive margin percentage expansion. We expect Installation Services to drive both topline sales and overall market share by expanding our value proposition. We continue to evaluate opportunities to grow the business in additional areas where we can leverage our competitive advantages.

With respect to new store openings, during the quarter, we opened one new store and we will continue our selective approach to future openings. As you have heard us say, we are focused on improving our operations as they stand today. We see opportunity to expand our store footprint.

However, and we will continue to make investments in new store locations where we are confident we can produce an attractive return on our investment. So we're making good progress on our key initiatives but we still have opportunities to enhance what we're already doing.

Our team is focused and determined to execute on those opportunities as we look ahead to 2017. Now let me hand it over to Marty to walk you through the numbers in more detail.

Thank you, Dennis, and good morning, everyone. Thank you all for joining the call and I look forward to working with you all. I'm excited to join John, Dennis, Greg and the broader Lumber Liquidators team and have enjoyed the spirit and energy of the group during my first month. By way of introduction, I joined Lumber Liquidators after roles as CFO at Kohler Company in Wisconsin and prior to that, as Treasurer of Georgia-Pacific in Atlanta.

With that, let's get to our third-quarter results. For the third quarter, net sales were $244.1 million, an increase of 3.4% over last year with comparable stores'' net sales up 1%. This increase was achieved despite reduced promotional emphasis compared to the year-ago quarter when our assortment was weaker. We saw our transaction count, what we've considered a proxy for store traffic, grow, even if only by 0.5%.

We've also been encouraged by some of our internal survey data, indicating an improving consumer attitude towards the brand since earlier in the year. And as Dennis mentioned, we continue to grow our installation sales. I do want to break down for you the sales performance just a bit as a comparable sales gain of 1% consisted of merchandise comps at minus 2%, offset by the growth in installations.

On the merchandise side, the decline of 2% reflects lower solid sales which, in particular, are comping against heavy discounting last year and bamboo, where we began clearance activity in anticipation of new items rolling out now. These declines were mitigated by the growth we saw in the laminates and vinyl categories, where we introduced new products during the quarter.

The slight decline in merchandising sales were more than offset by growth in installations, which almost doubled from Q3 last year. Looking ahead, we believe improved store operating performance, coupled with a new broader assortment that is weighted towards faster-growing categories, will continue to stabilize and ultimately grow our revenue base.

Now let's take a look at gross margin. For the quarter, this came in at 31.4% and for what may seem like a long time, there are no material items we'd identify impacting that number. Last year's gross margin was 30.1% on a GAAP basis and if you exclude the cost of test kits, as shown in a supplemental table of our press release, last year's gross margin would have been 31.1%. So this quarter was better by 30 basis points.

This gross margin was favorably impacted by reduced discounting relative to last year, particularly in our solid lines and by the growth in new products in the manufactured lines. But this was somewhat offset by obsolescence cost related to the transition of the assortment and to a lesser degree, the higher mix of installation sales.

Just as a reminder, installation sales are slightly dilutive to the margin percentage, but bring incremental dollars to revenue and cash flow while expanding our potential customer market. You'll note that gross margin declined approximately 2 points relative to Q2 of this year when excluding the items we've highlighted at each quarter end.

That deterioration was a function of additional promotional activity. Some of the clearance work on bamboo and engineered categories, as well as the same obsolescence and mix effects of installation sales we saw in the year-over-year comparison.

Now let's take a look at SG&A. SG&A expense for Q3 was $100.7 million, or 41.2% of sales, compared to $88.3 million, or 37.4% of sales in Q3 of 2015. SG&A included incremental legal and professional fees and other costs of approximately $11.2 million, reflecting our ongoing efforts to resolve legacy, regulatory and legal issues.

This compared to incremental legal and professional fees of approximately $11.8 million in the year-ago quarter. These items are tabled out for you in our press release. Absent these items, SG&A expenses up over quarter were up $12.9 million from a year ago. $3.5 million of that increase was from heavier advertising.

About $3 million of it reflected incentives and other investments we've made in store operations, including installation-selling resources, and the remainder was driven by the investments in capabilities across the Company from compliance to IT to finance.

That takes us to operating profit. As John stated, we incurred a loss of $24 million compared to a loss of $17.3 million last year. Excluding both the cost of sales and SG&A items per the schedule in our press release, the operating loss would be $12.8 million compared to a similarly adjusted Q3 2015 loss of $3.1 million.

To wrap up, I'd like to offer a little of my perspective on the Company as a newcomer. First, while we've had more than our share of legal and regulatory issues to address, the broader organization is not consumed by them. We are moving forward and are focused on managing the business and sales performance.

Second, we clearly have a lot of work to do on balancing sales growth against gross margin and SG&A investments to get back to where we need to be in our business model. I can see the investments we've made at the store level to drive the brand and customer experience and the investments we've made to build sustainable corporate capabilities like compliance, IT and finance.

We now have the task of balancing these investments against topline growth, such that we return the Company to profitability. We are working hard on levers within gross margin from pricing to assortment to sourcing. We are also scouring our SG&A spend, and ensure it is as efficient as it can be and we believe there are ways we can optimize this structure.

But I also hope investors agree that getting the cost structure right is a different kind of problem than sharply falling sales. In any event, optimizing the cost structure is at the top of my action list. Thanks for your attention and I'm going to hand it over to Greg for a little bit more on taxes, cash flow and the balance sheet.

Thank you, Marty, and good morning, everyone. Our effective tax rate for the quarter was 23.6%, driven principally by an increase in evaluation allowance against certain of our deferred tax assets and our projections of pre-tax income for the remainder of 2016.

We expect that our tax rate in the near term will continue to be impacted by valuation allowance and deferred tax considerations. However, we anticipate our long-term tax rate will be consistent with historic levels.

Now let's look at our cash position and liquidity. We ended the quarter with $8.8 million in cash and cash equivalents. The decline in cash was primarily attributable to recent operating losses and a planned build in inventory during the third quarter, partially offset by increases in our payable accounts.

The plan build in inventory will support sales in early 2017 and also supports our efforts to have the right product available for our customers. I will remind you that our cash flow for the quarter included the receipt of $22.1 million related to the carryback of our 2015 net operating losses to prior periods, where we generated taxable income.

In August of 2016, we amended our asset-based revolving credit agreement. While subject to certain limitations, the amendment extended the maximum amount that we could borrow under the facility to $150 million. At September 30, 2016, we could borrow an additional $95.7 million under the facility and had outstanding borrowings of $20 million, consistent with the amount borrowed at December 31, 2015.

We remain confident that our liquidity is adequate to fund our business objectives. Regarding our inventory position, available inventory per store was approximately $595,000, as of September 30, 2016, up from approximately $577,000 as of December 31, 2015. This reflects a shift forward in the timing of planned inventory increases ahead of the spring selling season.

We continue to make progress in the strengthening of our assortment and in-stock levels. Our inventory levels at September 30, 2015, included $22 million of inventory written off in the fourth quarter of 2015. I would now like to turn the call back over to John for his closing remarks.

Thanks, Greg. As we close, I wanted to reiterate that we are confident in the potential of Lumber Liquidators. We believe we offer a great value proposition for our customers, have a solid operating plan, and have the right team in place. We do understand, however, that we have a long way to go.

To all of our associates who have been so dedicated and have served our customers with excellence and integrity, thank you. Your hard work has been critical to positioning Lumber Liquidators for success and growth. With that, operator, we are now ready for questions.

Thank you.

(Operator Instructions)

Peter Keith, Piper Jaffray.

This is actually Jon on for Peter. Marty, we'd like to say congratulations to you and welcome to the Company.

Thank you.

First off, congrats on your positive comp in the quarter but is there any commentary you could provide throughout the quarter and any fluctuations you might have seen or any weakness potentially heading up to the election here in October?

This is Dennis. I can say that we did not see any fluctuation of any substantial measure throughout the month. It was pretty solid across the entire quarter for us.

Okay. Great. And then if you look at the Installation Services outperformance you called out. What's really driving that? Did you change your promotional strategy there in the quarter or anything?

Well, as you may or may not be aware, we're not fully deployed in terms of installation in the Company. Were only about two-thirds, so Marco and the marketing team have carefully started to introduce installation into our marketing plan but nothing substantial over last quarter. So, we really have just really focused on the execution and selling installation in the stores.

Okay. And then just lastly in looking at your SG&A and your legal and professional fees, I know they are going to run elevated here for a little bit longer, but I guess how long do you expect them to maintain at this current type of run rate? And is there any timetable on which you can provide us and when we might start to see them fall?

This is John. I still don't have any timetables for you. We are continuing to cooperate with the investigations and defend ourselves vigorously in the lawsuits but I don't think at this point in time, we can give you a timeframe that we can be confident in that those are going to come to an end.

Okay. Great. Thanks. Good luck in the fourth quarter.

Thank you.

Seth Basham, Wedbush.

My first question is just on your promotional and advertising effectiveness. If you could just give us a sense of how you think those performed this quarter relative to the first half of the year, that would be some helpful perspective.

Seth, this is Dennis. I will start us off. As I've talked about in Q2, we've spent a great deal of time in the second quarter and the third quarter and well into the fourth quarter of really balancing the health of our assortment. That said, that gave us the ability to start to market across all categories, as we started to see these new products come online in our store.

And really, our focus has been on really driving traffic and as we debuted those new assortments. So more of a focus on our expanded line and making sure that we were talking about the new products that -- to drive traffic, so --

This is John. I will add to that. It's been some experiments with the advertising spend. As you remember back in the second-quarter, during June, we cut some advertising, hoping that we would have better closure rates in our stores and we learned a lot from that. As we rebound from the high turnover of last year and get our store associates trained, we do believe that there will be some leveraging ability.

We will have some ability to leverage our advertising spend; however, we're not quite there yet. Our staffing levels have gotten better in our stores. We're working on the training and the closure and we hope to see fruits of that labor sometime in the future.

Okay. That's helpful perspective. If you look at your cost structure in aggregate, there's been a meaningful step-up, even excluding the one-time costs that you lay out in your press release. Should we think about this as the ongoing cost structure going forward?

Yes. This is Marty and I will offer some perspective here. First of all, we are thinking about profitability so that is in our sights and on our minds. The second context is that this is the strongest assortment we've had in some time and the best store execution we believe, anyway, the best we've had in some time.

So the part of the SG&A step-up around selling, the store installation, pro sales, that part and the advertising, those that drive traffic and then drive conversion in the stores, we're likely to keep spending as long as we're convinced that it's driving the topline. On the corporate capabilities, that's still developing just a bit.

I started late in the quarter; the CIO started late in the quarter. We're still doing a little bit to fill out and finish off the compliance program but we are looking at ways to optimize that and we're fast about that. And then there is the set, besides the unusual items, there is a set of professional fees, legal fees, other operating expenses that we are, as I said, in my comments, scouring now and really trying to impact as fast as we can.

So, again, I would say these are conscious, disciplined, spending decisions that we're making with the best interest of the Company and really focused on profitability. I think that's the best we can offer from a guidance standpoint.

Very good. Thanks a lot.

Greg Melich, Evercore ISI.

Two questions. One is, with the increase in advertising. Could you give us a little more details to where and how and what you're focusing on with that advertising? And then second, with the upcoming change in the salary threshold by the Department of Financial and Regulations Board, how many of your employees are impacted by that and have you already started to adjust for it? Thank you.

Greg, this is Dennis. I'll take a stab at both of those. First, as it relates to advertising, as I mentioned earlier, we really have been focused on the health of our assortment. And if you look back at what's happened to the Company over the last year, say, year-and-a-half, we've had a lot of interruptions in both supply and were really late coming with some of the product mixes.

So, as we shored up both our laminate assortment, our vinyl assortment as well as our engineered assortment, it gave us the ability to advertise broadly. And as so that was really the change that you saw in our marketing, as well as starting to address --it got to a point where we felt like it's -- we were comfortable addressing the brand and starting to drive changes in our brand marketing.

As going forward, I think you'll see more of the same. We're focused on driving traffic in as we continue to debut new assortments and I don't think what -- you'll see more connection across our web, and across social media as well as our direct mail. As far as the associates go, most of our field teams were -- would have been impacted.

We've already adjusted for that and as I mentioned earlier in my comments that we had -- we've already -- we've reengineered our store compensation model, if you will, to make sure that we're balanced, had an appropriate balance of commission versus what we call our structured or static pay. So we're in a good position. We're aware we need to be and it's been well-received in our stores.

And so presumably that's with less commission and more base salary? Is that a --

I think that's fair. Yes.

Does it have an overall year-over-year cost that we're already seeing in the numbers?

Very minimal, if any. We were just really -- it did a couple things for us, Greg. It really -- we were out -- we were really looking at our compensation plan to make sure that we had something that was competitive and so this gave us the opportunity to look deeply across the whole organization in terms of how we centered our sales team, but are expecting no incremental costs.

Great. Thanks a lot. Good luck.

Thanks.

Simeon Gutman, Morgan Stanley.

One more on the marketing or the advertising spend. Can you quantify with us what it was up year over year and then bigger picture question. You mentioned trying to balance the trade-off between comps and I think you talked about the gross margin of marketing dollars. I'm trying to get a sense, how are you looking at this quarter? Are you encouraged that there is a response to the increased marketing and ongoing with the discounting? Or is the rate of change here, the one comp put on a much lower EBIT dollar base, is that discouraging, at least relative to how you were planning the quarter?

Well, this is Marty. Let's start with the advertising. First, it was up $3.5 million for the quarter versus the year-ago quarter. Year-ago quarter was up -- was a tough news cycle for us, a little light. So that's part of that year-over-year change. You might need to repeat the second half of that question. We weren't quite clear?

Sure. I'm trying to get a sense what this quarter shows us at a high level. You've got a positive comp. What we're seeing is at a weaker profitability so I'm wondering if you walk away from this quarter encouraged that, look, we can stimulate business here and there are things that we can begin to drive comp? Or do you step back and say, look, does it create some pause that, the relative amount that we have to spend here to start getting the engine rolling again, is actually costing us more than we thought?

Yes. I would tell you that we're encouraged. I mean, if you think about, particularly the work that John has embarked on since he started as the CEO, the first half of the year was full of noise. We were in the news several times and so, John -- he really started building the team and then we had to start to rebuild the assortment and rebuild operations in the field and so the encouragement is that we saw our sales grow.

We saw footprints in our store grow and we saw slight growth in our transactions and so, the work that Marty talked about is our work to do. Now that we've -- are determining what we think the trajectory of the business is going to be and how our -- the consumer is responding to our new assortment, to our new marketing, we're very encouraged.

So I would tell you that there's clearly work for us to do, as Marty mentioned, in rightsizing the SG&A but what was important for us is that the customer responded to our new assortment and to our marketing. So -- and I would tell you that we're -- today is the last day of the month for us in October and we remain encouraged.

We are seeing improvement across the board. So our progress is steady. We've got, clearly, a lot of work to do on our cost structure but we are really pleased with the performance of our assortments and seeing that continue through to --

I would just add and reiterate something that Marty said in his prepared remarks which is getting the cost structure right. It's a different kind of problem than trying to stem falling sales. And so while I might not use the word, encouraged, I'm directionally correct would probably be a word I would use in terms of where our sales are going and now we can do, I believe, some fundamental work on the cost structure and some fundamental work on cost of goods.

We've said that in previous calls that we haven't been in the strongest negotiating position as it relates to acquiring product. And the stronger we get from a liquidity standpoint, from a sales standpoint, the more we could add there. And so we're looking forward to accomplishing those tasks.

And then my follow-up question on the cost structure and on SG&A, in particular. We heard you mention a few things that still are bringing up the curve and you mentioned some level of investment. I think you mentioned compliance and there might be some other areas.

But the net takeaway is that you're looking to take cost out of the cost structure, when you say streamlining it and it kind of goes on the bigger question. Have we seen the full run rate of investments that are happening in the business or are there more to come and then you can look at rightsizing the cost structure several or maybe a year down the road?

Yes. I think to be honest, we have to say there is a little bit more to come. Just some of the leadership that started late in the quarter and so whether we can start to optimize -- the optimized part of that in time to affect the quarter, again, we're a month into it so that is going to be a little bit challenging. So, as you think about the immediate term --

I do believe there are a lot of moving parts in our SG&A. As we talked about some nonrecurring items, we do have some investments that we've made that we think we will be paying off and we do believe we have some opportunity to reduce some of the cost structure. So, it's a lot of levers within it.

I think Marty is right. Directionally for the fourth quarter, it's hard to imagine it going down but for 2017, it's going to be one of the major focuses of the management team and we do expect to reduce that run rate in 2017.

Okay. Thanks, guys.

Matt Fassler, Goldman Sachs.

My first question relates to marketing. In your marketing stance in the past, Lumber Liquidators has been extremely loud and visible, almost brash reach for value proposition and I know you've pulled back from that to some degree. As you reassert your marketing spend and try to re-brand the business out there and you're starting from a sales level that's a bit lower than the Company has historically run, how are you looking to frame the Company in the marketplace to differentiate the brand?

Matt, it's a great question. Obviously, we've been focused on driving traffic while starting to address brand issues. But, as I said in my prepared comments, we saw wood and wood-look flooring, and it's important for us to be one of the industry leaders. So part of that is making sure that we are trend-right and that our styles match today.

What our customers are looking for and then focused on innovation. So you'll see us with somewhat a softer approach in the terms of look and feel of our marketing campaigns. If you had a chance to look at our last catalog that we mailed out, we really -- that was one of our first efforts in terms of really focusing on trend, style, design, and innovations.

And then we're also -- we're focused on making sure that we're talking about our flooring experts. We invested a tremendous amount of time in the quarter with our store teams and really focusing on training, training about the product knowledge, product installation, and just the overall assortment. You'll start to see more and more of that in our marketing campaigns. While traffic is always going to be important to us, we're not -- all of our locations aren't what you'd call Main on Main.

So traffic is really important to us. But I think positioning ourselves as a responsible retailer or flooring with the best knowledge in the business is something that you'll really see loud and clear, and not so much screaming in the future. So it's important to us.

We've got to be priced right. We will continue to use it to drive traffic but we're really focused on the reputational things that we believe are important to our consumers and making sure that we've got the word out there that we're focused on the whole customer experience.

Thank you for that. Second quick question. Also, I guess on the product side. If you think about the luxury of vinyl and tile classification, broadly speaking, which as best we can tell, is again from the market share and the market more broadly, you spoke about wood look. You spoke about some of the newer products you have in the store.

Where are you in terms of ramping this classification? Is it a category where you feel you can achieve a very competitive position, as you have obviously with traditional hardwoods?

Yes. Yes, we do. In fact, vinyl is not a new category for us. We had vinyl in our stores last year but what we've really focused on this year is the engineered vinyl category. And our -- the health of that assortment, I'll be honest with you, we were kind of late to the game.

Obviously, we were focused on other areas of our assortment but we are -- we continue to make progress and we will be -- we will complete our assortment probably somewhere mid-November. But we are happy with the performance.

Our marketing -- and our merchandising team has done a great job trending and making sure that we've got the right styles. We believe that we've got a positive impact to come from our -- filling out our assortment as it relates to that type of vinyl flooring. But, like I said, the vinyl flooring, we had in stock.

And then one final question. You also spoke when you were going through margin about obsolescence and we're just looking for elements that might be -- might still be tied to legacy factors and to the extent you're still turning over your assortment to some degree. Curious, in ballpark terms, how significant that obsolescence issue was -- and at least incremental to what you might experience or in normal quarter going forward?

Yes. Matt, it's Marty. We -- first of all, we do the same analysis every quarter about the -- our inventory quality, what we discontinued, how old it is, what our prospects for liquidation and disposition of that is. So it's normal course of activity for us.

Year over year, that comparison was about $2 million or about 1 margin point worth that impacted us. Sequential quarter was more like half that. And I would like to say that we're through it but we are still churning over the assortment which gives rise to some of it. So if we're -- we think we're largely through it but maybe a little bit more and certainly on a longer-term basis, we should see that come down.

Got it. Thank you so much, guys.

Thanks.

John Baugh, Stifel.

First, just to clarify, John, you made a comment on SG&A coming down in 2017. Was that inclusive or exclusive of the one-timers?

That was exclusive. We're hopeful that both come down but we can't really give any color on that. But I would say exclusive of the one-times, we're going to be working very hard to reduce SG&A as a percentage of sales. It's one of our top priorities for 2017.

Great. Thank you. (multiple speakers) And go ahead --

I was just going to say that's, on a percent of sales basis, and certainly the first half of this year was a lower SG&A spend rate on a dollar basis.

Got it. And then could you comment on where you are with ceramic plank as it relates to your freshening styles and getting the merchandise assortment where you wanted to be? Give us some color on the vinyl? It sounds there's a little bit more to go and I guess a broader question -- as we look at gross margin, where are we in terms of the floor being fully set with the new stuff.

You gave some commentary just recently on the legacy impact. That's helpful. I'm just curious, when will be fully set on thee floor, and when we, as observers of your results, would maybe look at gross margin as where it's going to be longer term? Obviously, installation is going to weigh on it but it sounds like you've got some factors that are going to be positives as well.

This is Dennis. I will take a -- I think your first question around the -- wood-look ceramic tile. It's a very small part of our business. And we'll continue to have that in our line-up because we feel it's appropriate and is a good alternative for some of our customers in some of their homes in terms of what application they may have.

However, we will continue to make sure, as with the rest of our floors, that we've got the right style, trends and colors that the customers are looking for. So I think you'll always see that as a part of our line-up. A couple of things that I will mention as far as the timeline. First, about three quarters of our stores are what we call our legacy stores and didn't reflect the store set that you see in one of our current new store openings, meaning that we didn't offer everything in those stores.

I would say probably about half to three-quarters, depending on the store size, that the assortment was available to the customer. It makes it really difficult for a customer shopping our web versus shopping our store.

So our -- we are back focused on resetting all of our legacy stores to have what we call max plan-o-gram, where we are getting all of our styles, all of our assortment and colors and trends out in front our customers in all of our stores. That we are planning to have finished by the end of this fiscal year.

Secondly as it relates to the assortment, we are planning -- we fully expect to be where we want in terms of the breadth of our assortment by middle of November. We are pleased with the progress we are making but it's still a work in progress and I would also add that, as Marty talked about obsolescence, we are also making sure that, that plays a part going forward, in what we call our line review process, so that we are thinking about.

So we don't put ourselves in a position where we have a large amount of obsolete inventory that is still in our warehouses when we are debuting a new assortment. So we will continuously update our displays with fresh looks but we expect to be complete with our assortment and our breadth by mid-November.

Great. Then my last question, maybe a two-part question, is you mentioned that due to concerns of lack of liquidity it was tough to buy product as effectively, as I'm sure you'd like, going forward. Have you seen any change in your sourcing costs as a result of the improved liquidity? And then also along with that, are the compliance costs in terms of impacting cost of goods although there may be staffing stuff that falls in SG&A, are we in a full run rate now? Or if not, when will we be in terms of where you want to be with all the compliance safety issues? Thank you.

This is Greg. I'll step back just for a minute to make sure we've got this clear. We -- when we comment about our liquidity and not buying product at the most optimal point, I think what we're really highlighting is that there was a lot of work for this management team to do to make sure we could service our customers appropriately.

Getting product, getting the right product was more difficult than it should have been and now when you look forward, we've increased our line. We've highlighted that for you. We have a different level of liquidity and we're able to go out and talk to and describe to our vendor partners why doing business with Lumber Liquidators is important, why we can provide a great value for our customers.

So we're doing those things, and again, kind of stepping back, we've highlighted in past quarters, we believe the long-term margins of the Company are still in the mid to upper 30%s range. We've got some work to get there. Things to do. John highlighted a couple of them. But there are a number of levers that we're going to have to pull to make sure that we get to those targets that we've set out for ourselves.

And I will just add to those comments that on the compliance side, we believe we are getting near the full run rate of compliance and having our compliance team in place. I don't think we've seen the full effect on cost of goods sold yet. I think we've got some maturity to do there, to go there, but from an infrastructure standpoint, I think we're at our full run rate.

Thank you. Good luck.

Thanks.

Laura Champine, Roe Equity Research.

I wanted to talk about your payables performance, which has been pretty good the last couple of quarters and it's helped cash flows. What's driving that? And how sustainable is it?

This is Greg, again, Laura. Obviously, as we've worked through a difficult time, we are trying to be very smart about how we manage the Company's cash. We worked with our vendors and our vendor partners to ensure that we are spending our money at the right time and putting it in the right places and so the short answer to your question is it was intentional to do that and we think it's sustainable.

I would -- this is Dennis. I would also add to Greg, we've also focused on having our inventory in the right place. And for a long time, our strategy was to sell it, then ship it from our distribution center. What we've really focused on the last couple of quarters is making sure that we have the right product in the right place and that's in our stores. And not all the product belongs in our stores but those that the customer wants to take with them and our best sellers, we believe, the right place is there. It's helped us be more productive and we feel that has been accretive to our sales progress as well.

Great. Thank you.

Thank you.

Keith Hughes, SunTrust.

Just going back to gross margins for the last time. I know you've had to change a lot of your -- where you source your products from the last several years because all of the controversy. Now that you're spending more money on compliance and such, is that now starting to open back up the possibility of revisiting where your source product from in 2017 and beyond?

I would follow up on my previous comment about compliance and some of the things I've said in previous quarters. It's our goal to be able to source product from anywhere in the world that we need to source it. And I think we spent a great part of this year building that compliance team and those capabilities.

I think just now, we're starting to get the ability to go different places. We are seeing that and getting the assortment better in the stores. I would say we're -- if you ask us where we are on that, we're just getting started and we expect to get better and better at it through 2017.

Okay. Thank you.

Dan Binder, Jefferies.

Based on the progress that you saw this quarter and October in the store, I'm just curious as you think about next quarter and the quarter, after should we expect to see sequential improvement in the comp store sales or do you think it will stabilize into this low single-digit level?

Well, we'll be pretty consistent in the fact that we're not going to give guidance, other than it would certainly be our goal to see it increased in comp sales but we're not going to give guidance to predict that.

Well, what are you seeing from an industry promotional standpoint? Is it better, worse, about the same as where it was last quarter?

This is Dennis. I think we've seen it pretty much about the same and I think, obviously, fall flooring business is -- takes a tick up as people start to think about preparing their homes for the holidays. So I think when we look at -- Marco and the marketing team look at advertising compare it to year over year, we saw it was about the same period. And, really, don't expect to see much in terms of change in trajectory anytime soon as it relates to what we saw last year.

And then your own promotional strategy as we move through the next quarter or so, it seemed like you were pulling back on it and I think you said at one point early in the call that you had a little bit of pick-up this quarter. Just trying to understand how you're thinking about that going forward.

Well, as I mentioned earlier, we feel that we've got a much broader assortment to advertise and we'll continue to keep the same cadence of our marketing. We are focused differently, as it relates to how we went to market last year. We were really focused on knowledgeable associates, focused on trends and styles as well as a making sure that we're as broad.

We want to advertise across the entire assortment rather than what we were forced to do in the past was kind of go very deep into a narrow assortment. So you'll see that change -- continue across this quarter as well into next year.

And the only thing I would add to that is that we are hopeful but as our brand continues to improve and our staffing and knowledge and training improves out in the stores, that we can leverage that advertising spend somewhat.

Where would you say on that point, where would you say you are in terms of the training? Are we thinking still in the early innings, middle innings, late innings? It sounds like you've done a lot already but I'm also hearing that there's room for improvement. Just trying to get a better handle on where you are with the progress there and where you want to be.

Well, there's two initiatives that we've focused on in the last year that we feel runs alongside our normal business model and that's our installation and our pursuit of the pro-customer. That has changed somewhat how we train our associates on the customer interaction in the store. And we focus heavily on that.

Our pro-sales training and our installation have been a big part of what we've done. Think about it this way. I mentioned that the flooring installation is pretty complex. A lot goes into that, particularly when you're dealing with hardwood flooring. So, we want to make sure that we're good at it. And we want our associates to feel like they've got the knowledge to really talk the customer through that project.

We want to make sure they're not disappointed. That's why we brought the installation in-house. We just didn't feel comfortable truly owning that customer experience with somebody else at the helm in terms of the installation. So we've really focused on installation training and we will continue to do that.

That will always be a big part of what we do. Product knowledge is something we focus on day in and day out. And I can tell you that most of our stores are focused on training between customers. There's generally not a day goes by when a portion of the payroll spend that we have in each and every day in our stores is not focused on some sort of training.

And we'll continue that. We've got some great vendor partners that have really helped us with this and so we'll continue to conduct training in our stores. Will conduct it off-site with our vendors but so to give you an inning, I think we're -- I'd like to think we'll be stuck in the seventh inning forever because we'll always be training our associates. It's a big piece of what we do. So I hope that answers your question.

Okay. Thanks.

Thank you. Budd Bugatch, Raymond James.

Welcome, Marty. Good luck to you and to the team there as well. Just a couple of questions on -- first on mix. Could you give us maybe a little bit more color on mix between solid, engineered, laminate? I know Installation Services is new this year or significantly new. Maybe give us a little bit more flavor on how that has and then maybe if we could drill down a little bit now until where the margin characteristics of those now differ?

So, Budd, I'll take -- this is Dennis. I will take a stab at that. I would tell you that without really disclosing what the make-up of our business is as it relates to our mix, there's been a lot of noise in it over the last year, year-and-a-half, if you think about the interruption we've had in several of our assortments. So, we are kind of seeing that return to normal, if you will.

And it's -- and we expect that. As we've had a lot of focus on solids and the performance of solids but we've also been focused on an re-introducing, if you will, a new laminate line. So we're really are still trying to figure out what normal is for us but I can tell you that looking at the past and looking at how our performance of our assortments is now, we are seeing that come back to where it was, what I would call pre-60 minutes.

And engineered has also had some significant body blows with anti-dumping duties. Where are we sitting on that today? How much of that is now still sourced from China?

I would tell you that engineered has been a big focus for us. We had a lot of holes in our assortment as relates to engineered. We've seen a big shift. You heard Marty talk about bamboo a little bit. We've seen a big shift from solid to engineered. We are still kind of focused on rightsizing that assortment. That's probably the biggest assortment that we have to fully bake as it relates to what I told you would happen in the month of November.

So I -- our sourcing hasn't changed dramatically. But we are focused on always, as John said, we feel like now we're in a position -- Jill and her team have -- and Marco and his team have built the sourcing and compliance teams. Right now, that we feel like we can go source anywhere we really want to as long as we feel those two teams are working together.

And that may have an impact on where you see us source from in the future. But right now, we are just trying to get the assortment healthy.

But I would just add to that, that we do understand that what vendors have anti-duty charges and attached to them and our merchants are doing the best to strike a balance between risk of anti-dumping duties but also making sure we have consistent and the right products out for our customers to buy and we referenced what those numbers are for you in past calls.

You may recall then as we buy those products, we are accruing what we think we will have to pay in terms of anti-dumping duties for everything going forward and there's a small amount, if you will, call it, $45 million of costs that we have and we've highlighted it in our Q are out there that relate to past purchases. We understand (multiple speakers) and we're managing it.

That accrual shows where -- does it show on the balance sheet or is that show up in inventory?

There's about $10 million-plus on the balance sheet and another $45 million that we haven't accrued for because we haven't set final rates for that period yet. So a good portion hasn't been paid, $10 million-plus of it. But again, we're managing the balance of having the right products for our customers and understanding that these anti-dumping duty issues are out there and we have to manage them as part of buying wood for our customers.

Okay. Dennis, I think you said at about two-thirds of the stores have Installation Services where you want them -- what -- in those stores. What percentage of transactions is that installation attached?

It was north of 10%.

And what do you think is normal? You've had experience in this category for a long time (multiple speakers) --

I would like to install it all but I'm really not sure. My experience with installation -- I've done it for a long time but it's pretty much, I've installed a lot more carpeting than I have hardwood floors and so we're still determining what that is. Because I -- but think we have opportunity on two sides.

Number one, first, we've got to get to full roll-out and there's a lot of complexity to that and Charles, our Head of Installation, and his team are doing a wonderful job with the roll-out. So, we're being as intentional as possible in terms of how we roll this out but we don't want to roll it out until we are ready. And that means we've got to have the support in place, the training in place.

I don't want to put that -- I don't want to put installation out there and then go train for it. So it's -- we've got a little bit of runway before we get fully deployed and like I said, when we do, it will be right. And then we will start to really know how much we'll see that as percent of penetration and then we'll start to focus on the store --each store's participation in the program.

And I can tell you that we've seen that grow each quarter. As we put more training out there, not only is the comp in installation but the comp in stores participating and then the penetration of that store's business for installation. So, it's a little early yet for me to tell you where I think that's going to land but I would like for -- and you also -- if you think about the flooring business, there are certain aspects or certain categories that lend themselves to installation as opposed to others.

There's some, I would call, maybe it's more of a DIY project when you think about laminates and vinyls. So we'll continue to make sure that we've got the right team in place across the Company and then how we talk to the customers about it.

I think probably over the course of the next quarter or two, we'll really start to understand where we think that's going to land as the percent of penetration of our total business.

But, and where you have done installation, have you done a Net Promoters Score to see how -- or something like that to see customer satisfaction on the installation?

We are working on that right now. Charles and our team in consumer insights are really focused on starting to get feedback from our customers. Again it's another reason for us to bring this in-house is we get the -- we want the customer feedback. Not only on our -- the performance of our team that sold the product, we want to know how the team that installed it and then how well we did with the follow-up.

So we also -- we want all of that. Were just now starting to build that structure for feedback from our customers. But we have what we call a production team in-house and that production team stays with the customers through the project from the beginning when we do the measure to the end when we kind of do the final walk-through, so we expect to have the initial read has been very positive. But we really don't have, what I would call, fully baked feedback mechanism in place right now. So that -- more to come on that as well.

Okay. My last question refers to the balance sheet. We've been accruing this accrued securities action issue. I think pro forma $250,000 added to that accrual this quarter. That sits on the balance sheet on the liability side and the insurance receivable sits on the asset side. How do they get resolved? Does that accrual on the liability side go through and become stock issued? Remind me what happens there? And then what do these receivables look like it will get paid? Because I think all -- hasn't it all been approved by the court?

So taking it in reverse order, there hasn't been --

It should be approved by the court, hopefully, November -- towards the end of November.

When that happens, that is the point at which all of the pieces, the cash flows that are associated with this as well as the stock pieces would be affected. So sitting on our balance sheet will continue to adjust the stock piece up and down until that happens, and at that point, we'll have a final cost of settlement, if you will, and those numbers will go -- we'll quote receive the cash to be funded and then we will issue the stock that would go along with it. At that point, it all comes -- leaves out.

So the $45 million could relieve by issuance of stock, right, Greg? That's what happens? The $45 million --

A portion of the $45 million so it's 1 million shares and the value of that 1 million, as it sits in our accrual today, is about $19 million. It will -- 1 million times our stock price at the end of the quarter. The rest of it is essentially the cash piece that we record -- that as an insurance receivable. So take your $26 million in insurance receivable for the securities litigation plus the $19 million in stock, and that's the value that Jill referenced would be done by the end of November. So I hope it to be done by the end of November.

I see. And so the accrual this quarter of the [$4,250,000], was that simply because of the change in stock price versus the 1 million shares? correct.

Correct. Correct.

Got you. All right. Thank you very much. It's very helpful.

Sure.

Thank you. I will now turn the call back to management for closing remarks.

I want to thank all of you for joining us and we look forward to updating you on our progress next quarter. Have a good day.

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