LL Flooring Holdings Inc (LL) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Lumber Liquidators Second Quarter 2017 Earnings Conference Call. With us today from Lumber Liquidators is Mr. Dennis Knowles, Chief Executive Officer; and Martin Agard, Chief Financial Officer. 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 reference the Safe Harbor provisions of the U.S. 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 and 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 these statements will remain operative at a later time and Lumber Liquidators undertakes no obligation to update any information discussed in this call.

Now I'm pleased to introduce Mr. Dennis Knowles, CEO of Lumber Liquidators. Dennis?

Thank you, Steve, and thank you all for joining our second quarter 2017 earnings call. I am joined by Marty Agard, our Chief Financial Officer.

I want to start the call by saying how much I value and appreciate our store and corporate teammates. To those of you listening, your diligence and hard work are paying off. This quarter we posted our third-highest revenue in company history. Thank you all very much and keep up the good work.

I'd now like to give you some quick highlights on our performance. In the second quarter we reported net sales of $263.5 million, an increase of 10.7% compared to the prior year period.

Comparable stores, net sales increased 8.8% in the second quarter, driven by solid performance across the board. Merchandise was up 6%, traffic was up 5%, average ticket was up 3.5% and our Pro and installed services continue to develop according to plan.

In addition, the product mix is right and our store associates continue to improve their product knowledge and selling skills. I also believe the brand continues to improve, as we focus as a team on developing and enhancing our position in the marketplace.

We told you that we planned to offer installation in all of our stores by the end of 2017 and we're right on track to meet that goal. At the end of June, Installation Services were deployed in about 80% of our footprint and the offering is not only contributing to revenue growth, but also expanding our appeal to a wider customer set.

We have also continued to enhance our relationship with the Pro customer, where our sales are going ahead of our overall growth rate. In the second quarter, we achieved our goal to return to profitability for the first time since 2014. I'm encouraged that our efforts to balance top line growth and cost disciplines are yielding results. However, I want you know that we are not taking a victory lap. In my view, these results reflect the benefit of executing on the basics, full employment at the stores, systematic training, smart pricing and the right mix of products and marketing without the overhang of negative media. Not easy to do but easy to understand. So as far as I'm concerned, execution thus far has been for table stakes.

The real work of uncovering and enhancing the value of Lumber Liquidators lies ahead of us, and I'm excited to work with our team to realize those opportunities.

Let me just mention a few more highlights before passing the call to Marty. Last quarter I told you about the launch our Dream Home Ultra X20 water resistant laminate, a Lumber Liquidators exclusive and our new Waterproof Click Ceramic Plank product. Customer feedback on these and other products we have recently introduced have been very positive and we believe they are helping us drive traffic, close sales and improve the overall brand.

We also talked about marketing last quarter. We have made a lot of progress here. I believe we are marketing smarter and more strategically. As I have mentioned before, our goal was to better align our merchandising and marketing functions with our operations so that we are merchandise-driven and customer-focused. And we are making real strides on this front. We achieved solid top line growth in the second quarter, while spending a little less on marketing than we did in the first quarter. Now part of the driver is that are Pro and installed business are not as dependent on the marketing spend, but it is also the case that our spend and promotional intelligence continues to improve.

Next, we continue to look for ways to sharpen our compliance efforts and operationalize our investments there. The hiring of Lee Reeves as our new Chief Legal Officer and Interim Chief Compliance Officer is a reflection of that focus.

On the legal front we continue to push forward on the MDLs. While we have nothing material to report this quarter and have made no changes to the reserves, we point out in our 10-Q that the court has taken some initiative to facilitate settlement discussions. That includes appointing a federal judge as a mediator and appointing settlement counsel for both the formaldehyde and durability plaintiff classes. While we view these developments positively, it's too early to comment on how they may affect the process.

In late July, however, we were pleased to see the CPSC close its matter with the company. Marty will have more to say about that and will provide some financial context, as well. The DOJ, SEC investigation is ongoing and there is nothing to add on that, other than to say that we continue to cooperate.

So, here is how I'd sum up the quarter. I'm proud of our team for a job well done and I'm pleased with the step-up in terms of growth and profitability. However, I also believe we have a long way to go to unlock the full value of Lumber Liquidators, so our plan is to stay the course as we have previously outlined: narrow focus and strong execution.

Marty, please take us through the numbers.

Thank you, Dennis and good morning, everyone. Let's take a look at the numbers starting with the top line. As Dennis stated for the second quarter, net sales were $263.5 million, an increase of 10.7% over last year, with comparable stores net sales up 8.8%, continuing our momentum in rebuilding our brand.

While the comp growth is still heavily influenced by the expansion of our installation business, this quarter expanded on last quarter's positive merchandise comps and benefited for the first time in several years from positive traffic growth, as measured by customers' invoiced.

Breaking down the comp results a bit, merchandise comps for the quarter were positive 6.1% and customer traffic growth was plus 5.3%. The installation business grew in our comp stores set by 60%, reflected continued geographic expansion this quarter in the Northeast, along with the strong growth in markets where we've been operating the installation program over the past year.

In terms of mix, the comp sales growth within merchandise was driven by the expansion of our engineered vinyl plank business, as well as our growth in wood-look tile, engineered wood products and moldings and accessories.

In addition to the growth in customers' invoice, we also had a 3.5% growth in the average ticket, which reflects the expansion of installation as an attachment and the growth in our professional business, which also carries a higher average ticket.

Before moving to gross margin, I should remind the audience that the 8.8% comp growth was comparing against a very challenging second quarter 2016, in the face of product safety concerns and media attention. So while we are pleased with our momentum, we do not expect this level of comparison in the next few quarters.

Now let's take a look at gross margin, which came in at 37% for the quarter on a GAAP basis, but was positively impacted by favorable revisions to both antidumping duties previously accrued and to our test kit reserve. While both reflect positive development, these P&L impacts relate to estimates made in prior periods and are not reflective of current period operational performance and so, should be considered separately.

Last year's gross margin was 29.7% on a GAAP basis but was negatively impacted by both antidumping accruals and the test kit charges in that period. If you exclude these items from both periods, the current quarter's gross margin would have been 35.5% compared to Q2 2016's gross margin of 33.3%. So this quarter was better by 220 basis points on an adjusted basis. Q2 2017's gross margin was also favorably impacted by the growth and improved margins of new products in the manufactured lines, improved attachments of non-flooring products with strong margins and lower transportation costs. This was somewhat offset by the higher mix of installation sales, which carry lower margins but expand our customer market.

Comparing sequentially to Q1 of 2017, which had no unusual items, its gross margin was 34.9%. So excluding the estimate revisions for the test kit and antidumping duties in Q2's results, we improved by 60 basis points, with incremental improvements coming in several areas.

In the context of guidance, we remain committed the upper 30s percent gross margin in the medium term, but will likely hold near current levels over the remaining quarters of 2017.

Before turning to SG&A, I'd offer a little bit more on the test kit reserve change. At our request over the past few months, the CPSC reviewed the test data and program to date and agreed to discontinue monitoring of the program and to close this case. We believe this reflects both the good test results produced as, well as the declining test kit requests by customers. We will continue to make these test kits available through our website and 800 number, but the combination of fewer requests and lower administrative costs of the program led to the reduction of the required reserve.

More than the favorable financial impact, we see this as another positive step in resolving this legacy issue and moving forward.

Now let's look at SG&A. SG&A expense for Q2 was $92.3 million compared to $89.9 million in Q2 2016. SG&A in the quarter included incremental legal fees of $3.6 million, while the year-ago quarter included $8.3 million in incremental legal fees and $0.3 million in other related items. These items are tabled out in the press release and in the 10-Q. And just as a reminder, when I refer to incremental legal fees, I'm talking about only those fees related to the major legal matters including the MDLs, the DOJ investigation and certain resolved past matters; those we see as both non-routine and were at the point of resolution, we'd expect the spend to stop. This is not referring to our normal-course-of-business legal fees.

When excluding these items, SG&A expenses for the quarter were $88.8 million or 33.7% of sales and an increase of $7.5 million from a year ago. This was heavily driven by increased payroll-based costs related to core store staffing improvements, investments in our pro sales and Installations teams and corporate capabilities. Advertising was also up from last year by about $1 million.

If compared sequentially, and again excluding the items tabled in the press release and the 10-Q, SG&A decreased from $91.9 million in Q1 of this year to $88.8 million in Q2, largely due to lower advertising costs. While balancing the seasonally heavier first quarter, advertising ran just under the $20 million per quarter recent average spend rate and does not signal a significant shift in our approach here.

I'll move down to P&L through the operating profit. For the quarter, we recorded operating income of $5.1 million compared to an operating loss of $19.3 million in Q2 of 2016, and an operating loss of $25.4 million in Q1 of 2017. Both the current year-ago quarters had several unusual items that impacted those results, as scheduled in our 10-Q and press release, but it [shouldn't recur], both on a GAAP basis and when excluding the unique items we've tabled out for you. The business is making strides, in terms of profitability through both revenue growth and margin expansion.

Now let's look at cash flow and liquidity. As of June 30, we had total liquidity of $83 million consisting of cash and availability under our asset-based revolver but not including the 2016 tax refund. Borrowings under our ABL facility were at $57 million compared to $72 million drawn at the beginning of the quarter, reflecting the reduction in the working capital.

Our inventory ended the quarter at $275 million, down from $301 million at the beginning of the quarter. This is consistent with past guidance and we expect inventory to decline through the third quarter to a range I've now set at $255 million to $265 million.

Lastly, as noted in the subsequent events footnote, since the end of the quarter, we have received a 2016 tax refund of approximately $29 million and reduced the drawn amount under the ABL facility to $42 million, while also building up our cash position. We remain comfortable with our liquidity.

On the investing side of things, we did not open any stores during the calendar quarter, but have opened 2 in July, bringing us to 4 new stores year-to-date through July and our total store count to 387. We still expect to open a total of 10 to 12 new stores this year.

To wrap it up for me, I am encouraged by how the business is improving and our balancing of top line momentum and cost discipline. That said, we have plenty of work to do and continue to see opportunities in front of us.

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

Thank you, Marty. I want to keep my closing remarks brief, as our plans for the year are consistent with last quarter and our progress is confirming that we're headed in the right direction.

Store performance. As many of you know, we have rebuilt our associate ranks over the last year, while aligning the compensation structure with growth-oriented business objectives, and we have added significant training programs. We are continuously improving our associate training and expanding those sessions to include installation, pro sales and many programs focused on selling skills.

We're also continuing to expand and improve our Secret Shopper Program so that we have good data on how well our associates are doing around the country and where we can find the opportunity to enhance the customer experience.

Our gap store program continues to produce results. We rotate stores in and out of that program, sharing best practices across the regions and stores.

Number two, enhancing our value to customers. It was truly gratifying to enter the spring flooring season with a full assortment and the right mix of products. Our team believed that if we had the right people and the right inventory, our customers would respond. I have been to dozens of stores so far this year and spoken with customers and associates across the country. The feedback has been resoundingly positive and it's showing up in traffic, ticket and customer satisfaction.

In addition, we are managing our assortment day by day and region by region now. We're focused on stocking the right mix for the right region, which should save on transportation costs and inventory buildup, as well as addressing any geographical preferences for product assortment.

Third, responsible compliant sourcing. The work we have talked about in the recent quarters continues and we are aligned with our vendor partners around the world, as we work to continuously improve our processes. I mentioned the investment we made this quarter in hiring Lee Reeves who is now our Chief Legal Officer and Interim Chief Compliance Officer. Lee built his career in retail law and compliance and we're excited to have him on the team and we look forward to his leadership over these important functions for the company.

As we have said before, we now believe that we can source from anywhere in the world with confidence, and we intend to keep it that way.

And fourth, expanding our business. We have already talked about pro sales, installed sales and our store network. These programs have good momentum and we'll continue to press forward. We're reaching a point where we can begin to consider ramping up store openings as we think about next year.

And finally returning to profitability. I'm pleased to report the profitability we saw this quarter but we need to sustain and build on our profitability so that our shareholders continue to benefit from all the work we've been doing and our stewardship over their investment.

We will remain prudent with our cash flow and liquidity and we will spend strategically in areas where we know we are knowledgeable and where there is a high return on investment.

As we wrap up, let me say thanks to the team. You're all tremendous assets that have enabled us to begin to turn to ship. Thank you to our loyal customers. It's our privilege to serve you and we really appreciate you, our shareholders, for your confidence, your support and your patience as we have executed our plan.

With that, operator, we'd like to open the call to questions.

(Operator Instructions) Our first question is from Simeon Gutman with Morgan Stanley.

It's Simeon Gutman. First question is can you remind us this big picture, what the impediment is to getting gross margins into the high 30s? You may acknowledge it's a mix of things like sourcing, distribution, less promotions or mix. And I realized you may not share a time frame with us, but is there an internal time frame that you have where you expect to hit that goal?

This is Marty, Simeon. So we feel good about where we are on margin. We feel like we're on track. We have worked on, have been working and will be working, in the near quarters around some of the, what I would call, smaller tactical items that include things like price discipline, some of the operational elements getting to gross margin like warranty and obsolescence costs. Meanwhile we've got a couple of longer-term things, longer-term over, let's say, a series of quarters that push us into those upper 30s. So as I said in my prepared remarks, we still have a target for that, have a plan to get there. We do have an internal sort of time frame in mind. It's measured in quarters, not years, but it's not imminent. And at this point, in these next few quarters, there's still just a sense that, depending on how product mix plays out and some of those seasonal variabilities, we're likely to be around these levels for a little while. So that's kind of how I would respond to that, I guess.

And you started the answer with something on pricing, you mentioned discipline. I don't know if that means that you're not optimizing your pricing? Or you're still promoting? Or is there still some discounting that could be taken away? And I just take that as being the key factor as opposed to something on the distribution side?

Really not. I would say we are working on pricing, along the lines of a little bit more surgical promotional activity and a little bit less markdown stuff going on at the stores. We think the product assortment is stronger now. We don't need to do as much of that. But it's really not a big mover that is going to get us into the upper 30s. That stuff is going to be more a couple of sourcing initiatives and more in the logistics supply chain space.

And my one follow-up is last quarter the balance between sales and margin was improved but I think in our follow-up call, you also wouldn't take any victory lap to say that we're in the clear yet. This quarter, now this is a seasonally bigger quarter, I think one of the biggest quarters of the year, and the business showed even a better balance than it was in the prior. Do you feel that outside of that seasonal bump, that the business now is demonstrating that it's in the clear, as far as balancing that mix between sales and margin?

I would say so. A lot of things, as Marty mentioned, when you think about what we're working on, markdowns, we also -- I won't say perfected, but spent a lot of time working on regional assortment and regional pricing. But the assortment is stable. We'll continue to tweak the assortment as any retailer would, which will afford us some more opportunities, I think, for expansion. But we also have spent probably the last 12 months working on our pro business, as well. And so, I think we're starting to see the balance stabilize. And we're kind of getting our operational muscle around that business as well. And as we continue to rollout the installation, as Marty has mentioned, there will be some pressure on that. But we do feel like we're starting to see the stability between -- in the balance that allows us to manage this on a day-to-day basis.

Our next question is from Dan Binder with Jefferies.

It's Dan Binder. You mentioned earlier about getting unit growth ramp back up, possibly next year. I'm just curious what your current thinking is on unit growth this year. And if you were to paint a picture that's more positive for Lumber Liquidators into the future, next 2, 3 years, what do you think ultimately the right unit growth rate is for this business, given the competitive landscape and white space, et cetera?

As we've mentioned, we still think -- we're still targeting 500-plus stores by '22. And there is a lot of markets out there where we currently don't have coverage. And then there's some markets that we feel like we can backfill to make sure that we've got adequate coverage within the market. So this year, we still are committed to the 10 to 12 stores. Obviously as Marty mentioned in his prepared remarks, that we didn't open any in Q2, however, we did open one in July, and realized we got a lot of work to do in Q3 and Q4 but we still feel like we're on target to hit the 10 to 12 for 2017.

And then given some of the success from your competitors, particularly Floor & Decor, and they have become a bigger focus for investors with their IPO. I'm just curious, can you give us a little bit of color on how you compete against them, both on price and what the impact is in the market when they open up against you? It's certainly been a focus of questions for investors we've spoken to.

Sure. I'll start and Marty may have something to add. We value really all competition because it helps us stay sharp. We've been pleased with how we go head-to-head with all of our competitors. As we look at the last 2 years, we've performed relatively well, considering all of the challenges that we've had. And so it gives us the confidence, with a healthy business, that we've kind of earned our right to start thinking about store growth again. And our assortment has been healthy and our stores are really coming on strong for us. And so we feel good about how we compete in the markets and we continue to stay abreast of what's going on in all of our competitors. I've been pleased with how we've perform in markets where we go head-to-head with all the big box competition.

And one last question if I could, on inventory. It's been coming down, you expect it to continue coming down. I think historically, one of the bigger challenges for the consumer shopping lumber has been sometimes, wait time. You've talked about your improvement in this area. Can you just reconcile with us how the inventory is coming down, where it's coming down? And your ability to continue executing on in-stocks and shorter wait times?

This is Marty. Some of the clients, just from the seasonal pattern, we really got it full at the end of the year and into the early part of the season. Part of that was bringing out a range of new items that we brought out in the -- earlier in the year and the broader assortments. So we're coming down from a very elevated level. Now at the same time we are trying to push kind of at the margin more items out to stores, so we have a little bit more of that product available to take with the customer from the store. So we're getting a little bit more into the stores, but the downward pattern is really compared to the earlier elevated parts from December and March, we expect it to shallow out in that 255 to 265 range, which is really not particularly depressed relative to where it was last year, let's say. And we think that still supports the customer and we're getting a better mix of products to the stores for them to take with. So I think we're kind of balancing both working capital sort of discipline and having good assortment to the stores.

Our next question is from Laura Champine with Roe Equity Research.

Can I just get a clarification on the discussion of gross margins for the back half? When you say that, that should stay fairly consistent with what we've seen in Q2, are you referring to the 37% level? Or the level excluding sort of onetime items of more like 35.5%?

It's the latter, more like what we call adjusted in the 35.5% range. We were at 34.9% on that measure in the first quarter. I said at the time, we would expect some modest upward movement through the year. We kind of delivered I'd say, on that, if not maybe came in a little higher than some of that target, but still think we can stay at these ranges. And we'll still work on moving it upward it's just, at this point, those steps are going to be small enough to where depending on exactly how the mix plays out and so forth. I can't promise you have 50 basis points up each quarter, so that kind of thing. But it is -- that discussion is on the adjusted number.

Our next question is from Matthew Fassler with Goldman Sachs.

Two questions. The first relates to brand health metrics. As you take stock of the consumer's perspective on the brand, you move further and further away from some of the reputational challenges that the company confronted. How are you measuring where you stand? And how is that influencing your ad spend and the nature of your ad dollars? Is it -- just curious, is this a situation where the better they think of you, the more you want to pump into advertising because the brand has resonance? Or is it a situation of if your reputational -- if consumers' perceptions improve, you don't need to spend as much? And I'm asking that questions as the ad spend remains quite well controlled, relative to historical levels.

Matt, I would tell you that there are several factors that we look at. As I've mentioned before, 2 of our initiatives, our installation and our pro sales, both those customers are a little less dependent on advertising and we've seen that play out. We have really brought some discipline to the marketing team, not just in how we go to market, but also understanding the success of our spend. So that we're spending where we need to drive the traffic where we need to. But the brands, from external measures, continues to improve and awareness is at an all-time low for us as it relates to our past. So we're continuing -- and it also didn't hurt us that we have a full assortment to market against as opposed to last year. So we'll continue to make sure that we're spending in the right place, allows us to kind of drive traffic into the categories that we want to and we continue to monitor that and measure that internally to make sure that we're getting smarter every day, as it relates to how we think about the spend. Our spend, I think at -- in years past, has been as high as 10%. We were just at about 7.5%, just under 7.5% for the quarter. So I'm pleased with the traffic and the customer response. All those indications are that we're doing some things right and we continue to learn how we operate in the kind of what I would call the post era. So we look at it every day.

Great. And then my second question relates to inventory. I think you gave us some pretty direct guidance, vis-à-vis Q3. Can you -- unless I missed it, tell us what your expectation is for year-end? And once we get to that level, should we start to see inventory essentially rise in line with total sales?

Yes. So by year-end, it should rise from the 255 to 265 range a bit. But I would say not as much as it did last year, we had more sort of product changeover going on. We took probably a bit more conservative position relative to the Chinese New Year interruptions and so forth. So I would say, coming up from the 255, 265 range at the end of Q3, maybe halfway or something like that, towards where we finished last year, which is around 300, so maybe it's 275, 285.

At what point would you -- I'm sorry...

I was going to finish your question there. There will be a seasonal pattern and I would say from the Q3 of this year, that lower range on up to Q4, maybe cycling down a little bit again toward Q3 of the following year would be our normal seasonal pattern. But then I would say that whole pattern will flex a bit with sales, yes.

So I guess, Marty in closing, on my question, would you say that this is the first quarter here in Q2 that we can think about kind of being in the normal level, where all that's going to move with the seasonality? Or is that going to be kind of Q3, where you get to the desired baseline?

I think we're close now, it might be a tad higher than what I would have said was the right baseline and by Q3 yes, we're on the baseline.

Our next question is from Peter Keith with Piper Jaffray.

Great quarter here. Nice to see some positive results. To follow up on Matt's question with regard to the advertising and the brands continue to improve and that's certainly what we see in our work. Could you talk about any view on, perhaps, just rebranding the company, particularly as consumer demand seems to be moving towards more of non-wood products that you guys offer? Is there anything you're beginning to explore with the overall brand name?

We are. As I stated in the past, Peter, for us it's when is the time right? And we want to have some of our legacy issues completely behind us. But as we start to think about that and if you look at some of our marketing events as of late, we're starting to introduce some elements of that. When you hear us refer to our Pro program as LL Pro Plus and LL Install Plus. We are starting to think about that. It is an expensive proposition when you think about rebranding the company. But it's -- this is on our radar. And as we start to think about the future, the next 3 years, it is definitely something that we're working through just kind of our thought process, our research and really thinking about when would the timing be right to do what we think is probably appropriate.

Okay. And then I know e-comm is not a huge risk to your category at this point. But could you give us an update on your website, maybe where that represents the percent of sales? And are you seeing a majority of those sales being picked up at the store?

Yes. We do offer buy online, pickup in-store. Current business through the web is at about 5%, it's about 5% of our business. We are seeing growth in that area. We offer buy online, pickup in-store. You can buy online, ship to home and buy online, ship to store. So there is obviously -- flooring is unusual in that it's very heavy and there's high cost of freight associated with delivery. We deliver to our customers, both our Pro and our DIY customers. But we see a lot of activity, a lot of our traffic is on the weekends. And we probably, I want to say, about 80% of our customers that shop the web end up making a purchase or we can link the purchase to a web visit. And we are -- and this is our work to do as well, is we want to continue to improve the customer experience. Our focus on making sure that we've got an experience that's either online or in-store or through our distribution channel that meets the needs of the customer, we know is an area that we can continue to improve in and make investments there, in the near term and future, to make sure that we're continuing to deliver that seamless experience for our customers.

Our next question is from Rick Nelson with Stephens.

I want to ask you about those same-store sales, how that tracked during the quarter. I know in 1Q you expressed some choppiness in sales during the quarter. I'm wondering if that was the case in Q2, as well?

It was not. We saw a sequential comp improvement through the quarter.

Any comments on quarter-to-date sales? Are they tracking similar to what you posted in 2Q?

I mean we continue to be pleased with the progression, early. It's awful early in the quarter. But yes, we're seeing our traffic continue, as well as response to our marketing events. So we think -- like Marty and I both said, Q2 was a little different in that we were going against some negative media last year. So I think we'll both be pleased if we can be somewhere between Q1's results and Q2 results from a comp perspective, but there's a -- we're still going against a little bit of noise from last year as it relates to the assortment. But we're confident that what we've been working on and our focus with the customer will continue to garner good results for us.

And from a promotional standpoint, could you add any events? Or are you in fact pulling back on those events you had planned for the second half?

We didn't -- we'll be about flat -- we typically spend less in the second half of the year and we'll stay with our spend. And as Marty and I both stated, our quarterly spend is pretty consistent and we plan to stay the course the latter half of the year. And when I talked earlier about the effectiveness of our marketing spend, our internal intelligence is really helping us make sure that we're thinking about whether we advertise items or whether we advertise categories and how those -- how the customer reacts to that. So we continue to use that intelligence to make sure that we're spending our money wisely and driving traffic, as well as store -- comps sales and managing our margin rate.

Okay. Also I want to follow up on the pro side of that house here, to big strategy. Is there a way to measure your success, percent of sales or some other metric with the Pros?

We pay attention to our penetration, our percent of sales. And as we've mentioned in the last call, our -- we're not focused on the comp perspective as much as we are the contribution that makes the total. And it's running just north of 20%. We continue to make progress with that, as we gain traction with that team. We feel that we've got a lot to offer the Pro customer any we've seen good response and are pleased with our progress.

Our next question is from Seth Basham with Wedbush Securities.

My question is around the comp store traffic. Very strong improvement, 5.3% increase in transactions in comparable stores. Can you give us a sense of whether or not that's being driven more so by footsteps in the store or conversion rates, when the footsteps are in the store?

Seth, I would tell you that it's a bit of both. As we talked last year, we installed traffic counters in our store. We're just about to anniversary that. But that has given us some more intelligence, as well, as it relates to what marketing events and how that's driving consumer response. But we had good traffic improvement sequentially across the quarter. And then our effort to drive the install in the pro business has helped average ticket. But I've also got to say that when you look at the work that Mark, our head of stores and his divisional VPs, our regional managers have really focused on selling skills in our store. And so we focus on things like attachment and selling up and selling additional rooms. So we've got to believe that the execution continues to improve and we see that across the board. So I would tell you that it's a little bit of everything. We're seeing the growth in the Pro. We're seeing the growth in the installation and the adoption, especially when you look at the number of measures that we get to perform installation. We're happy with the improvement there and we've been very cautious in growing that business because it's a complicated transaction when you're inside the home. And so we're pleased with the progress we're making. It's additive to our ticket and our traffic. We've still got a ways to go to complete the roll out. We feel like we'll be there. But I would tell that I feel like all 3 elements have been additive to both ticket and traffic.

And when you think about Pro and installation, in terms of contribution to the sales comp in the quarter, was there a bigger contribution this quarter relative to last quarter?

Yes, there was. The install business had a nice rebound. I guess it got off to a little slower start the first quarter coming off the holidays and stuff, and just the measure process and so forth. Whereas in the second quarter, their expansion caught sail, so it was a little bit higher mix and therefore the difference between total comps and merch comps is a little wider, if you went through the numbers, you see that gap being a little wider.

And how do you think about that trending in the back half of the year, in terms of their contribution to comps from installation and Pro?

I think -- this is Marty still, the install piece will continue. There is some chance it widens a little bit more, but I would say the second quarter was pretty representative. And then we'll anniversary that. We'll be fully expanded geographically by the end of the year, and then as we get into next year, the contribution from installs will still be there, but it won't be quite as dramatic as it is now. So that's the turning point, I guess you'd say, when we're fully installed across the country.

Our next question is from Brian Nagel with Oppenheimer.

So a couple of maybe longer-term modeling type questions. But clearly, sales are starting to rebound here. And as we look at the business now, there are new drivers of sales. But how should we think about potential for store volumes? With some of these new drivers, where we are now versus historical volumes? And then I'll follow up with one other question.

Obviously we're starting -- we feel like we're starting to turn the corner as it relates to our per store volume, not anywhere where we need to be or where we were historically. But we do feel like 2 of our initiatives, the install and the pro business will help us grow our average sales per box. We also believe, as we've stated in the past quarters, that it doesn't hurt having a healthy assortment and being relevant in the market. So we're -- we won't fully anniversary a full assortment until the middle of the end of fourth quarter. So we're still seeing that play out, but from a geographic standpoint, we're pleased with our performance. And we've got some pockets where we believe we could add stores and really help drive overall awareness. So we think we're on track but like I said, we still have got a lot of work to do and remain focused on a narrow set of execution steps to drive that volume per box. But that's been our focus with the regional teams as well as the store managers, so.

Got it. And then the second question on that is just as we watched sales continue to build here. You've done a good job of leveraging expenses on the SG&A line. At what point, or is there a point, which you maybe -- to continue to support better sales or have set some additional investment in SG&A?

Yes. I mean there will be a point when we're driving that revenue per box where we need to flex a little bit that -- the staffing in those stores. But we think there's some space between now and that point. I can't give you a revenue per store, at which point we would adjust that, but it is scalable enough to flex it and be able to drive the volume. And then a lot of those corporate capabilities in the Pro and installed teams that I referenced in the SG&A narrative, are fairly scalable within sort of the medium term, so we think SG&A is still scalable as revenue builds. I talked about this 90-ish million dollar adjusted sort of per quarter rate and we stand by that. We're running a little under it now, but that again, just allows a little bit of scaling of revenue against that number. So it's got some scalability in the near term, and then we can flex the store-level staffing just a bit. And I don't know if it's going to show up as a significant increase. So we feel good about the flexibility of that.

Okay, just one last one, I don't think it was asked yet. Any comment on sales support here in the third quarter?

Yes. Like I said earlier, we continue to feel like we're on track. It's awful early in the third quarter, but we've got a lot going on, in terms of rollout of installation and our focus on the Pro. So we're going to stay in the course. And our expectation is that, as we said earlier, there was a lot going on in Q2 last year that didn't help us any. So we benefited from that. And we expect our comps to be somewhere between where we were in Q1 and how we finished in Q2, I'd say somewhere in the midrange. But so far, we are pleased with our progress in the quarter but it's awful early.

Our next question is from John Baugh with Stifel.

Congrats on a good quarter. I just wanted to clarify, I wasn't totally clear on how much the install influenced the comp again here in Q2?

Yes, so John it's Marty. The merch alone was 6.1%, and the total was 8.8%. So you got, what is that, 270 basis points that is effective installs. And some of that, as I said earlier in my prepared remarks, some of that is the geographic expansion. But I would say even in markets where the install has been in place all along, it is comping higher than the 8.8%. So depending on how you want to think about that, that's what -- the installs was that 270-basis point contribution. And like I said earlier as well, that's a little wider than it was in the previous quarters.

That's helpful. And are you seeing in installs, different, i.e. better mix or similar mix to the rest of your sales?

I would say it's similar. We see a lot better attachment, as you would imagine with an installed sale. As I've talked about in previous calls, one of the reasons as an organization that we made the decision to do the installation was to kind of have control of the process from beginning to end. And that affords us the opportunity to make sure that were selling the complete sale and really taking -- kind of managing that project for the customer. So we're pleased with the progress that were making there. As Marty mentioned, stores that have been doing installation year-over-year are outpacing our overall growth, just meaning to us, giving us the confidence that our store employees are getting comfortable with the process and our installation team has done a nice job building our base of installers. So we like what we see with the ticket. And probably, I would say, the biggest surprise for me was the diversity of the product installed. You would think with installation it would be more the complex project, the solids and the bamboo. But we're installing manufactured categories, as well. So we remain pleased with that. We're focused on diligently rolling this program out, making sure that our employees are comfortable with it and that we're getting good feedback from our customers.

And then finally on the Pro, every retailer we're talking to is talking about how strong Pro is. And my question is, and you mentioned it's not as marketing intensive, but I'm sure you're doing some things to move the Pro. And I'm just trying to maybe get a better understanding of what those might be or are you just riding the wave that others are, that this mix is moving to Pro because there's just so -- big jobs are so strong currently?

That's a great question. It is interesting. You do hear the Pro come up on a lot of calls and earnings. It's -- it was a segment of the business for us relatively untapped for a long time. Lumber Liquidators really didn't cater to the Pro and we have a lot of the advantages that make doing business with us productive for the Pro. And we expanded those capabilities, as you've heard Marty talk about in the past. We have a one-to-one relationship with our Pro contact center, with our regions. And we've spent an entire year training our store associates at our national sales meetings and on our Saturday meetings about how to cater to this customer. We have a lot of, what I would call, competitive advantages that we're able to leverage against that customer. It was just a natural fit for us. And so we have our DIY customers, we have our Pro customers and then we have those customers who have a Pro. And understanding those 3 segments, and how they need us to work for them, has really been our work this last year in understanding where we can really take advantage of what we have to offer and this is a natural fit for us. So it's a business that I think as, just in the hard surface flooring industry in general, is growing, so is the opportunity for the Pros to take advantage of that. So we're just really leveraging what was really there before.

Our next question is from Budd Bugatch with Raymond James.

Maybe this has been asked and I missed it, forgive me. Can you talk about what percentage of the sales in the stores that you're comping with on having installation are being installed? And what those changes are and maybe what the overall penetration of installation sales are for the company? In terms of transactions?

We haven't laid all that out super clear, but I guess I'll say it's around 10% in the markets where installs are offered. So less than that, of course, across the total.

And where do you think that can go, Marty?

Maybe that's for Dennis to answer. But I would say 15%? Something like that, I guess. I don't know if we've got our target in mind. We're letting the customer kind of dictate that a little bit. We're building the Pro business at the same time. So we'll see how it evolves, I guess.

But I would tell you, just to add on Marty's comments, when I mentioned that we've seen -- I guess the surprise for me is the diversity of product that we're installing. It's encouraging to me that we can run higher penetration rate. We have 2 big states that we still haven't rolled out that are in the latter half of the year. And my past history tells me that those are strong states for installation. And so we'll see -- we should start to see that level out, probably around Q1. We know that adoption in our stores takes a little time. But Charles and the installation team have done a great job with training. So we're seeing our adoption ramp up quicker once we do the rollout. So I would be -- I've said before, I would love to install everything we sell, but I realize that's not going to happen. But probably somewhere between 10% to 15%, I think, would be a steady pace of installation for us. And we'll continue to make refinements to make that a more seamless experience for our customers and our store associates.

And lastly for me, is there any symbiotic relationship between the Pro sales and the installed sales? Or are your Pros using some of your installers? Or does that get you to a different Pro?

Exactly. That's a good way to think about it. We have Pros that use our Installation Services and we have Pros that do installation for us. So we feel like it's kind of a nice fit. It just allows us, as you know, the importance of a relationship in that business. This allows us just one more way to stay connected to our Pro customers.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Dennis for closing remarks.

Thank you all again for joining us. We appreciate your support, as we continue to build a better Lumber Liquidators. And we look forward to updating on our progress next quarter.

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