LL Flooring Holdings Inc (LL) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Lumber Liquidators' third quarter 2017 earnings conference call. With us today from Lumber Liquidators is Mr. Dennis Knowles, Chief Executive Officer, and Marty Agard, Chief Financial Officer. As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in full or in part without permission from the company.

I would now like to turn the conference 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 third quarter 2017 earnings call. Marty Agard, our Chief Financial Officer, is with me here as well. As always, let me begin by expressing my appreciation for the Lumber Liquidators team, both here at the corporate headquarters and in our stores. In my visits to stores throughout the country, I continue to hear very positive feedback about the experiences our customers are having when they interact with you. That's the kind of company we want to keep building, so keep up the good work.

Now, some quick highlights on our performance. In the third quarter, we reported net sales of $257.2 million, an increase of 5.4% compared to the prior-year period. Comparable store net sales increased 3.8%. We grew sales this quarter despite the fact that in Q3 of last year, we were advertising more aggressively and clearing out old inventory to make room for the new assortment.

I'd also note that we grew despite roughly 10% of our footprint being affected by severe hurricanes in Texas and Florida. We are thankful and inspired by the resiliency of our associates in these markets. They worked tirelessly to ensure that we were there for our customers, our communities and our affected employees.

We grew across all our key metrics, as well. Merchandise comps were up 1.8%, ticket up 3%, and traffic was up almost 1%. Installation continues to roll out on plan, and we're still on track to have these valuable services available in all of our locations by the end of the year. The pro business continues to perform to plan above the company average.

I am also encouraged to see that we are growing in a smarter way. We're driving a profitable growth from assortment improvements, strategic promotional pricing, store improvements, better inventory allocation, and new channels. This balanced approach ensures that we do not have to rely simply on advertising or mark-downs. Our focus on supply chain efficiency continues to pay dividends as well, and we have decreased our overall inventory but increased our store and DC in stock positions.

Another indication is that Marco and his team were able to take our advertising-to-sales ratio down to about 7%, the best leverage we have seen for a Q3. On top of these, we continue to see improvements in our associates and store staffing, and we are continuing improvements in both training and retention. Altogether, we think we have a stronger, more sustainable Lumber Liquidators, as evidenced by the continued gains in efficiency, focus and profitability.

I said last quarter that what we've accomplished in the last year has been for table stakes. We are now beginning to see the tangible benefit of that work, and we are gaining insights that will fuel opportunities to make Lumber Liquidators even better.

Let me touch on a few more items before handing it over to Marty. First, it has been really gratifying to see the positive response to our merchandise strategy. Customer feedback on our selection and styles have been encouraging across the board, and I believe it's not only driving traffic, but also changing the way people think about Lumber Liquidators.

Customers found we are a source for new styles and hot trends, like our crushed indigo stained bamboo. They also responded to our investment in the growing vinyl category and wood-look porcelain tile, with water-resistant products continuing to be a big draw for customers, particularly for those in storm-prone areas. We are committed to continuing to stay trend-forward in our assortment while efficiently managing our inventory and margin.

In early October, we held our first ever vendor partner summit here in Virginia. It was great to host over 80 of our vendor partners for a day and a half to discuss the future of Lumber Liquidators and the critical role they play. I am thankful for their participation and attendance, as many traveled from as far away as Asia, South America and Europe.

Our results this quarter validate our strategy to align our merchandising and marketing functions with a focus on store operations and customer experience. That process continues, and we are actively learning what is most effective in each market. We are leveraging that learning across all our businesses, especially with the pro and installation services, which are not as dependent on marketing spend.

We were also pleased last week to announce the execution of an MOU to settle the MDL cases. Under its terms, the company will contribute $22 million and provide another $14 million in in-store credit vouchers. While it was a subsequent event, those numbers are reflected in our third quarter financials. The final definitive agreement will be subject to various approvals and contingencies, so we still have some work to get it to the finish line, but we are gratified that we now have the framework on the cost and timeline to resolve these legacy matters.

Stepping back for a minute, over the past few years, we have invested significant internal and external resources to ensure our products are safe, compliant, and of the highest quality for all our customers. We were one of the first to offer phthalate-safe vinyl flooring. We have worked hard with our vendor partners to ensure that all of our floors are Greenguard Gold and FloorScore certified. We see our investment in this improved capability as an asset that can be leveraged in bringing innovative products to market and to pursue sourcing flexibility.

Another area of focus on the legal front, that is still ongoing, is the DOJ SEC investigation. There is nothing to add at this time, except that we remain committed to fully cooperating with the government on their investigation.

That covers the third quarter. I'm very proud of the LL team and what we've accomplished over the past year. I'll be back in a moment to talk about our near-term initiatives, but will hand the call to Marty now to take us through the numbers. Marty?

Thank you, Dennis, and good morning, everyone. I'll start with a few comments about our sales results. For the third quarter, net sales were $257.2 million, an increase of 5.4% over last year, with comparable stores net sales up 3.8%. This consisted of merchandise comps up 1.8% and installation sales up 34%. The overall 3.8% comp growth was split between average ticket expansion of 3.0% and traffic growth of 0.8%.

While these results were a little below our initial projections, we believe they were modestly impacted by the storm activity in September, particularly the consumer slowdown going into and after Irma's arrival in Florida. With Harvey in the Houston market, we had 10 stores close for an average of 3.7 days and saw sales dip for 2 to 3 weeks. Sales in these stores are now running well ahead of pre-storm rates, but for the quarter, the net impact was about neutral. In Florida, we had 28 stores close for just over 4 days on average, and these store sales have only recently returned to pre-storm rates.

To give a gauge on the aggregate storm impact on our sales, we ran our comp store results excluding these markets, and we also compared the post-storm sales pace in these markets to their pre-storm levels. These approaches are obviously imperfect, but resulted in an estimated negative impact of approximately 90 basis points to our reported comparable stores growth in this quarter.

While we regret the pain and devastation the storm caused the people in these regions, we are taking aggressive measures to have stores well-stocked and well-staffed to both support these communities in their recovery and to ensure we are there when they are able to rebuild.

As an update on our installations program, install sales grew in our comp store set by 34%, reflecting continued geographic expansion this quarter in the Arizona and New York areas along with double-digit growth in markets where we've been operating the installation program more than a year.

I would like to put our top-line results in some context. A year ago, we were running heavy advertising and clearance activity, as we both saw our first positive comps since 2014 and wanted to make room for the new assortment items we introduced in Q3 and on into Q4 of 2016. This dynamic is also reflected in the substantial improvement in gross margin from a year ago. So we are pleased with the quality of our sales in the face of both the storm impacts and last year's discounting and clearance.

With that, let's take a look at gross margin, which came in at 36% for the quarter on a GAAP basis and was not impacted in either direction by unusual or legacy activity. Last year's gross margin was 31.4% on a GAAP basis and also had no unusual activity affecting it, so the current quarter's gross margin was better by over 400 basis points, driven by reduced clearance activity and the mix in higher margins of our newer manufactured product lines slightly offset by the higher mix of installation sales that carry somewhat lower margins.

Comparing sequentially, gross margin was up 40 basis points from Q2 2017 when we exclude the test kit reserve and anti-dumping credits, both of which favorably impacted that quarter's results. Please see the table in our press release and 10-Q for the specifics of these unusual items.

Now, let's look at SG&A. SG&A expense for Q3 was $110 million, compared to $101 million in Q3 2016. SG&A in the quarter included an $18 million accrual related to the execution of the MOU last week, incremental legal fees of $2.9 million, and a $1.5 million impairment related to a legacy vertical integration investment. The year-ago quarter included unusual costs related to last year's security settlement and incremental legal fees. These items are tabled out in the press release and in the 10-Q.

When excluding these items, SG&A expense for the quarter was $87.6 million, or 34.1% of sales and a decrease of nearly $2 million from a year ago. That reduction was driven by advertising, which was down from last year by about $3 million, reflecting the year-ago heavier spend to help restore traffic and stabilize sales, but I had mentioned ad spending was close to Q2's level and does not reflect a material shift in strategy here.

On the payroll side, we've largely anniversaried the 2016 investments in core store staffing our pro sales and installation teams and corporate capabilities. If compared sequentially, and again excluding the items tabled in the press release and 10-Q, SG&A was down slightly, going from $88.8 million in Q2 of this year to the $87.6 million in Q3.

I'll move down the P&L to operating profit. For the quarter, we reported an operating loss of $17.3 million, compared to an operating loss of $24 million in Q3 of 2016 and an operating profit of $5.1 million in Q2 of 2017. Both the current and year-ago quarters had several unusual items that impacted these results, as scheduled in our 10-Q and press release, and we think it's important to look at our results with these items set aside. When doing that, we had an operating profit of $5.1 million, in line with our second quarter results and well ahead of last year's operating loss.

One quick comment on taxes. You'll see that despite the pre-tax GAAP loss, we had tax expense. This mainly reflects the resolution of the IRS audit covering the 4 years 2013 through 2016. Given the span of this period and the amount of activity occurring in that window, we are pleased to emerge with so few adjustments and now put this in the growing list of things we have put behind us and can better focus on our future.

Now, let's look at liquidity and cash flow. As of September 30, we had total liquidity of $115 million, the highest it's been in some time, in part a function of being at the seasonal low point in terms of working capital. Borrowings under our ABL facility were at $32 million, which compares to $57 million drawn at the beginning of the quarter. Our inventory ended the quarter at $253 million, down from $275 million at the beginning of the quarter.

Not to be overlooked, through 9 months of 2017, we have had positive cash flow from operating activity of over $20 million. As we anticipate the MDL settlement payment coming during Q2 of 2018, we are comfortable with our liquidity to satisfy this obligation, while we preserve the option to use a mix of cash and stock. We will make a final decision about this financing as we get closer to the funding date.

On the investing side of things, we opened 3 stores during the quarter and closed 1, bringing us to a net of 4 store additions year-to-date September and our total store count to 387. We expect to open 5 to 6 new stores in the fourth quarter, bringing us to 9 to 10 net store additions this year.

I'll offer a few comments on guidance. As I stated earlier, we estimate the storms cost us approximately 90 basis points in comp sales growth in Q3, but expect them to have a positive impact in the fourth quarter. Estimating the extent of this is speculative and depends on both Houston continuing its acceleration and the Florida market ramping up, which has been a little slower than our past experience might suggest.

Regardless, we are investing in those regions with personnel and inventory and wish the best for those families and communities in rebuilding. The storm tailwind should help us get to the mid to upper single digits for comp sales growth in the fourth quarter.

We expect gross margins to be similar to the last few quarters, though with promotional mix in Q4 seasonally a little higher, we may not see the same steady sequential improvement we've shown in the past 4 quarters. That said, we continue to target the upper 30s gross margin in the medium term.

SG&A, excluding the various types of special items we separately disclosed all year, should remain in the $88 million to $90 million per quarter range for the next few quarters, consistent with past guides.

To wrap it up for me, I am pleased we have taken the significant step on the MDLs and framing the potential settlement as we've done with the MOU, and am encouraged by the continued effectiveness of our assortment and driving growth and profitability. That said, we have plenty of work to do and continue to see opportunities in front of us.

I'll now turn the call back over to Dennis for his closing remarks.

Thank you, Marty. As we close, let me give you a quick update on our initiatives. These are consistent with what we've shared over the last few quarters, and I believe our results demonstrate that we're right on track.

First, store performance. We have talked at length about the importance of training at the associate level, and while training never truly ends, particularly as new associates join us, we believe the right structure is now in place across our entire network. Now we can concentrate on execution. We want a consistent, high-quality experience for our customers. We are confident that focusing on our people will provide long-term value to the company, particularly as we increase touch points with the customers in areas like installation and pro sales.

Our gap store program continues to increase our efficiency, and by the end of the year, we will also use that to evaluate our installation services execution in all of our locations. I mentioned last quarter that we rotate stores in and out of that program, sharing best practices across regions and stores.

Marty mentioned we closed 1 store this quarter. We opened this store in 2012 in a small market. This closure was not part of the larger program, but rather due to shifting demographics and a poor location. We are still comfortable that we are on track for 500 stores by 2022, and we already have a nice pipeline in place for 2018.

Second, enhancing value to our customers. We believe we have been carrying the right mix of trend-right products for a few quarters now. As we anniversary the full assortment in late Q4 2017, we'll have the opportunity to test and refine in a way that we've not done before. Feedback continues to be positive, and it's driving traffic, ticket, and customer satisfaction. I told you last quarter that we are managing our assortment day by day and region by region now, which is helping us better manage transportation costs and the inventory cycle.

Third, responsible compliant sourcing. We believe we are operating effectively in this area too, but we are always looking to improve with our vendors. Many of us on the senior team were in Asia and Europe this past quarter, building relationships and beginning new ones. We were pleased to see that these potential partners recognize our hard work and progress over the past few years and want to be part of the LL future. As we have said before, we now believe we can source from anywhere in the world with confidence, and we intend to keep it that way.

Finally, expanding our business. We've already talked about pro sales, install, and our store network. These programs have good momentum and will continue to refine and improve. We are excited about 2018. Now that the fundamental model is operating properly, it is giving us the opportunity to reevaluate the whole business with fresh eyes. From the manufacturing source to the customer's floor, we've been working with our strategic planning team to lay out our longer-term initiatives, and we look forward to sharing that vision with you next quarter.

As we close, let me say thanks again to the team, our vendors, our customers and our shareholders for their continued support. With that, operator, we would like to open the call to questions.

Thank you. (Operator Instructions). Our first question is from Simeon Gutman with Morgan Stanley. Please state your question.

I wanted to ask you about the tradeoff between sales and margin. It's an ongoing discussion, and it's certainly a balance given some of the things that this business has gone through, so I wanted to get your sense of were you pleased this quarter with how that played out?

And Dennis, you just teed up a couple things about 2018, and you said you get to rethink some things. My question is now that the pieces are in place, especially the mix of product, does it make sense to step on the marketing gas a little bit for next year so that, I guess, the consumer can fully reengage with the brand again?

Yes, I think -- Simeon, we look at that. We looked at that really hard in Q3, and while our spend was down the last year, as Marty said, we were really last year trying to accelerate the sale of product that we were getting out of to make room for the new assortment, so there was a little bit of noise in that in Q3, but really for the first time, in Q4, we'll start to cycle through this full assortment and really understand how each category reacts. But we certainly are staying in tune to that and will make the necessary investments and the marketing spend that we need to as we see how these assortments react.

But as I said -- I think I said this in the Q2 call, we will -- we also will ramp up grand opening advertising as we open new stores. So we definitely are paying attention to how each category performs and what channels we choose to market in, and we'll act accordingly to make sure that we're driving the appropriate traffic in the store.

With regard to sales -- and wherever the run rate of this business should be at this point is unclear, but if there is a hold-back to the productivity at this point -- and I'm referring to the product sales -- is there a perception issue that still exists in the market? Is it an awareness issue? Is it the competitive landscape?

And I'm coming at it because it feels like the top line -- I think you mentioned it performed well this quarter or in line with your expectations. It felt like, at least with all the hurricane activity, even excluding the 90 basis points -- to us, it could've been a little stronger. Maybe you disagree, but curious what the hold-back of stronger sales could be at this point.

Well, we definitely had sales that were in line with our expectations. I think I said in the Q2 call I would've been happy somewhere between Q1 and Q2 sales for Q3 and Q4, and it was -- what really seemed to hurt us, I guess if there was anything, it was what we saw happen pre-hurricane.

Hurricanes -- there's a bit of slowdown that occurs before they hit because people are kind of focused on securing their homes, or if they have purchased flooring, they certainly don't want it delivered in the midst of a hurricane coming on. So that was what we really felt, was just kind of pre-hurricane and then, obviously, the post-hurricane activity. But barring that, our sales were on track with where we thought they would end up.

And just a big-picture question, forgetting about this quarter for a minute, whether it's marketing, there's an opportunity, whether it's just awareness, perception -- can you touch on those as potential either hold-backs or opportunities for sales growth?

Simeon, I think what you're asking -- when you talk about perception, Marco and his team have tracked consumer sentiment for the last 2-1/2 years, particularly paying attention to how the brand shows up as it relates to awareness of 60 Minutes and laminate, and it's at -- in Q3, it was at an all-time low. In fact, it was below any period since the original airing of 60 Minutes.

So now we feel like we're in a position where we are really getting the MDLs behind us and we're really focusing on that brand building, so I think we're in a good spot. All indications are that awareness is at an all-time low, and I know myself and the team are focused on looking forward and making sure that we continue to grow in those particular areas where we struggled before. So I think I answered your question, but if I didn't, let me know.

Our next question is from Seth Basham with Wedbush Securities. Please state your question.

My first question is just understanding your fourth quarter trend to date and your guidance a little bit more. Marty, could you give us a little bit more color on how the business is trending for the first month of the quarter? And as you think about the mid to high single-digit comp guidance for the fourth quarter, how much of that is driven by a boost from the hurricanes in your estimation at this point?

Well, we've typically not broken out the monthly results, haven't for a while. I would say that the October yard sale went quite well, sets us up in line with that guidance, since obviously that's informing us as we set guidance like that, so I'd say that's consistent, of course.

The storm piece, there is a range around the storm. We are comfortable with Harvey and Houston. We're seeing those stores accelerate, and that feels good. On Florida, we're still sort of making our way back, I guess I'd say, and are not seeing a surge there yet, but it certainly could happen. We've modeled the Louisiana storms a year ago. We modeled Sandy. Both of those are kind of our examples. They're a fairly wide range of results from those two examples, but we tried to pick and choose modeling these storms in that context.

I chose not to give a range related to the stores because it's kind of a wide range, but let's say it's probably somewhere between 100 basis points and 300 basis points, probably at the lower end of that range, again, depending on how Florida goes. So that's included in that mid single digit, upper single digit guidance that I gave you guys.

Got it. That's helpful. And then just a little bit more context around the sales in the third quarter in terms of the tradeoff between advertising and clearance. I'm not sure if you could disaggregate any impact or any comp trends for non-clearance product. And then, secondly, as it relates to advertising, any sense what the decline in advertising year-over-year -- 13% is pretty significant, what that may have done to your comps?

No, I would tell you that it's just a bit too speculative, too many variables at play between the consumer overhang from a PR standpoint to some of the product assortment that was inconsistent a year ago, to the advertising heavy-ups that were going on. To try to break some of those pieces down is just too hard.

Our next question is from Matt Fassler with Goldman Sachs. Please state your question.

My questions focus on the balance sheet. So the inventory ended up I think a bit lower than the range you said we might see. Kind of curious how that related to sales trajectory, your purchasing patterns, et cetera. And then related to that, the accounts payable came down substantially sequentially and from the prior year, so just any color on whether that related to a slowdown in recent purchases or some other proactive decision you made about inventory funding. Thank you.

Yes, Matt, it's Marty. We had been talking all the way back when inventory peaked in the first quarter about bringing it down to -- I started with a range of $255 million to $275 million. We narrowed that to $255 million to, I think, $260 million or $265 million last call. It came in just below that at $253 million, of course, and we feel good about how we are bringing that down.

Our out-of-stock performance actually has improved from a year ago. We feel good about inventory availability and can operate at these levels. It is a seasonal low point. We'll start to ramp it back up a little bit in the fourth quarter, but only into that sort of $270 million, $280 million. So we feel good about how it's come down. I would say it was planned all the way from back in February.

The shape of that bring-down was particularly steeper later in the quarter, and that left the AP cycle at particularly low levels, and we are back to pushing all the way through cash discounts and really sort of aggressively managing AP at this point from a discount standpoint. So I think that explains kind of both those numbers.

It's a fair amount of seasonal pattern going on in there, and -- but, again, as you think going forward, I will say the inventory cycle will not be nearly as severe this time around. The assortment changeover is not as severe. Our vendors showed through the Chinese New Year thing that they could keep production flowing well, so we probably will not need to hedge as much as we did earlier last year this time around. So we like the balance sheet quite a bit.

And if I could just follow up on 2 of those answers. So if we think about the payables as a percent of inventory going forward, it has been kind of all over the map, but the mid-teens level that we show this quarter is at the low end of the range that we've seen over the past 3 or 4 years. The number has been as high as 40, but more often than not, most quarters, it's had a 2 handle on it. Is that where you would expect to see that payables ratio generally settle?

I think so. I mean, again, I've only been through one cycle where we were building a particularly high level of pre-build around the inventory and we stretched AP a bit. With a stronger liquidity position and a more modest inventory build, I would say it'll stay down at this lower end of the range, yes.

Did the cash discounts that you received as you were paying a bit more quickly contribute to the gross margin as well?

Very modestly in the third quarter, and I would say it's not going to be a big factor, but it's a positive one. It's one we are pursuing, but not so much in the third quarter really, no.

Got you. And then one final one. So you talked about the anticipated impact of the storms for Q4. Given the kind of damage that was done in Houston -- and I know that Florida caused, I guess, less flooring damage, most likely. What's your sense of the duration of the rebuild effort in Houston as it relates to the flooring business? In other words, how many quarters going forward do you think we'll be talking about this as being meaningful?

I think the next 2, really the fourth quarter and first quarter -- not that it'll all be gone and done by then. We appreciate the rebuilding these guys have to do, but the meaningful sort of lift will be, I would say, a couple of quarters.

In Florida, it's different. Florida is going to take longer to be there. It's dispersed geographically. The damage was different, to where it's just going to take longer. So I don't know if we'll actually see a particular surge or whether we'll just sort of feel some tailwind over a whole year, let's say. I could see an example like that. So that's as clear as I can paint it for you, I think.

Our next question is from Brian Nagel with Oppenheimer. Please state your question.

I want to start, I guess, focusing on the bigger picture, but just discuss somewhat the overall competitive environment in your category. Have you seen some of the larger players push more aggressively into it than smaller players and such? And did the hurricanes at all, on a very short-term basis, affect competition?

Well, I'll take a stab at this and then let Marty chime in, but I did feel like the competitive pressure picked up in Q3, particularly for just the flooring categories, albeit whether carpeting or hard surface. But generally we see that as a help to us, and it just brings attention to the category.

But I did feel like 1 in particular of our competitors stepped up their marketing for flooring in general, but we saw this as good news for our category, particularly as we're still kind of cycling the addition of vinyl in a lot of our waterproof categories.

And then as far -- really, we know that everybody was impacted by the hurricanes in Texas and Florida. To the extent, I really couldn't tell you. We were so focused on our stores, making sure that we got our employees out of there safe and got our stores buttoned up and then were back in the markets as soon as we could be.

Got it. And then I guess the second question I have. With respect -- as we look out with sales, clearly there's some noise, if you will, with the recovery efforts getting under way in Texas and Florida. Marty, you were just saying maybe a couple quarters, but as we look out into 2018 -- and recognizing you don't have longer-term guidance yet, but how should we think about this sustained sales trajectory? And to what extent is that -- will that be dependent upon new product introductions in addition to what you've -- the shifts you've already made in the product mix?

That's a great question. As I mentioned in my prepared remarks, as we cycle through fourth quarter, we'll hit the first time that we had what I have called a healthy assortment, and then we get into the daily, quarterly, even monthly maintenance that goes on with managing an assortment. And we have particularly paid attention to the waterproof categories and will continue to grow with those categories as we see opportunity.

And as I mentioned, there really is a lot of focus on the innovation in those categories, whether that be new textures and colors and styles, and we really focused on making sure that we've got what we have called trend-right product, and we'll continue to lean into that. We're seeing real strength and innovation both in the laminate and in the vinyl category, and all have made significant strides over the past 2 quarters, so we'll continue with our normal cadence of our product line reviews and making sure that we're appropriately assorted both from a depth and breadth perspective.

Got it. If I could just slip one more quick one in there. Any latest thoughts on a resumption of more aggressive new store openings?

Yes, we've talked about getting to 500 by 2022 and have something in the 25-ish range that we think is a step -- that should be the kind of pace of that, and that would be kind of some range around that for next year.

If you think about our fourth quarter, we talked about 5 or 6 in the fourth quarter, which is not the best quarter for opening stores. Frankly, we'd rather be doing it earlier in the year and away from the holidays and stuff, but we are going to get 5 or 6 open. We've opened 2 here in October, another 1 early in November, so we're going to start to feel and feel that we can open at that kind of clip. So, yes, I guess you'd call that ramped up. It's been half that level the last couple years.

Our next question is from Peter Keith with Piper Jaffray. Please state your question.

A question on the install service initiative. You've had that in place now, and you've ramped it up nicely. It's going to be in all stores by the end of the year. Does that now begin to slow as a benefit to your overall same-store sales, or maybe conversely, there's a maturation dynamic to it and so the benefit could accelerate to the overall comp trends? I'm curious how we should think about that looking forward.

Exactly, Peter. You're thinking about it the way we are. We'll see the growth continue as we enter -- the last 2 big states for us are the state of California and Florida, and we're well on track. Charles and his team are on track to have everything rolled out by the end of the year.

But you're right in terms of kind of the maturation. There's 2 aspects that we focus on, and number 1 is the training with the store employees as it relates to kind of creating a good customer experience for installation. The second piece of that is the work the company is doing to make that an easier process both for the customer and the employee. So we expect to see the growth that comes as a result of the rollout, but also are focused on increasing the penetration. So we feel like we've got a great deal of opportunity ahead of us in 2018.

Okay. Thanks, Dennis. And just heading back to maybe talking -- if could just talked about it, just the mix of product and areas of outperformance. I think you mentioned laminate and vinyl as areas that are doing well, seeing innovation. Are those the 2 categories that are outperforming the most right now? And what does the margin of those categories look like compared to the house average?

Yes, really vinyl and, I'd say, tile have been the strongest. Our engineered -- we brought a fuller line of engineered solids out that has also found its niche. So those are probably the strongest performing. The vinyl products have above-average margins, but we really haven't gone into a lot of -- any breakdown of the margin by category for anybody and just don't want to disclose that, but it's above average.

Okay. Maybe more simplistically, to wrap it up, are the categories that are outperforming having a positive mix shift to your gross margin?

Yes, absolutely.

Our next question is from Keith Hughes with SunTrust Robinson Humphrey. Please state your question.

Kind of building on the last question on installation. If you strip out installation, can you give us any sort of feel for what the ticket on product would look like in recent quarters and your expectation for the future?

You're asking -- I think our product ticket was up. I think I mentioned that, or Marty did, it was up on an average sale basis. Is that what you're asking?

Are you including that -- are you including the install sales on average ticket, or is that taken out?

Yes, that is included, as is the pro business, and that's part of what pushes that up, generally, is both a combination of, in some cases, the install being attached and then the pro ticket tends to be bigger, is bigger on average.

Okay. So is there a way to get to just the product? Because that's kind of moving the number up. If you don't have it, I can get it from you later.

Mathematically, yes, we could get at that. I don't have it here at my fingertips.

Okay. Okay, that's fine. I'll get it from you later. And you've called out vinyl now for several quarters in a row being an outperformer, as it has in the entire industry. I guess my question is what -- can you give us, relative size, what does vinyl represent of your business right now?

It's one of our strongest categories in performance, as you said, but I would say it's probably -- I don't know that we've ever really talked about the penetration of our total business, but it's one of our better-performing categories as it relates to total penetration.

Okay. And final question on that, just pricing around vinyl -- are you seeing any change there, ticks up, ticks down in addition to the strength of volume?

Not necessarily changes in pricing, just the availability of price points. They've made great advances, the manufacturers have, over the course of the last year, and so we're seeing longer planks, wider planks, varied widths and textures, so it's opening up more price points for us. So we -- that's where we're seeing the expansion, but if you're talking about competitive pressure, we really haven't seen much as it relates to pricing.

And is that your average selection there from a price perspective? I know you called it out as an enhancement to gross margin, but if we compare it to, for example, say laminate, your laminate price, is it still below kind of what you would average, your average laminate price in the store?

No, it's about similar, maybe even slightly above.

Our next question is from Rick Nelson with Stephens, Inc. Please state your question.

I'd like to follow up on the same-store sales guidance for the fourth quarter, and if you could provide some comments as to how you're tracking relative to that guide in the early going of the fourth quarter.

Yes, it's Marty. Just to reiterate what I said before, we don't want to get into that, into disclosing each month, but clearly we know how we're doing late into the month of October and feel like it's consistent with that guidance, so I just -- that's as far as we want to go on the monthly breakdowns.

Also, on the installation business, can you quantify how much of your sales are done with installs?

Yes, it's approaching 10%. Let me find the specific number here. Yes, 8%.

Thank you. And I realize that's a lower gross margin category. Any other financial metrics around that business that would be helpful for our models?

I'll give that some thought. I don't have a particular idea in mind to help you there.

Yes, I would say there are some metrics that we look at that we haven't shared. I would tell you that we look at the average labor per ticket and we also look at the number of measures sold, and we look at those internally because they're kind of leading indicators for us.

The measures sold is when a customer comes in and requests us to come in-home and provide an estimate for installation, and so that's kind of the leading indicator for us. We haven't shared that, and, to be honest with you, I'm not really sure that I want to, but we also look at the products sold with the installation, what that average is, and we really haven't shared that as well.

But we'll give that some consideration because we realize it is essential for you to understand that business a little better as it relates to Lumber Liquidators and how to build that into your model, but I'm not ready to share it at this point.

Okay, fair enough. Also, now with the MDL settlement, I realize that you still have the DOJ and SEC litigation pending. Should we see a substantial pull-back now in these professional legal fees, or are they going to remain elevated?

So the MDL was approximately -- has run year-to-date sort of approximately a third of that incremental legal fee that we flag and report separately, and it'll continue certainly through the year as we get the definitive agreement in place and deal with sort of getting through the funding stage, probably on in through the first half maybe of next year, but then it should subside. That third of it that's MDL should subside substantially and, as we've indicated all along, ultimately go away.

The DOJ will continue to run -- we've not given guidance. It's a little hard to gauge how that process will run, but it is certainly ongoing, and we'll continue to separate that legal fee stuff, the unusual stuff that will ultimately go away when the cases are resolved. We'll continue to flag that like we have.

(Operator Instructions). Our next question is from Dan Binder with Jefferies. Please state your question.

A few questions, first on product availability. I know you said that that's looking pretty good. I'm just curious, specifically in the storm markets, are you able to fulfill orders in a similar fashion with similar lead times that you do in non-storm markets, or is there product availability issues in there? And then, also, I know you quantified roughly the comp impact. I was just wondering if there was an EPS impact, just from an SG&A standpoint, from those storms in Q3.

Well, I'll talk about the inventory availability in the storm markets and let Marty handle the EPS impact. So having some history, you may remember last year there was significant flooding in the Louisiana market, and we had a great deal of learnings as a result of that activity that took place down there. We actually opened an incremental store to house additional inventory, and we've done that in the Houston market as well.

We have shared I think in the past -- we did a lot of work this year. We actually brought on a VP of inventory management to really help us hone this skill set. And in doing so, we -- the one thing I would reiterate is that while we lowered our inventory, we've actually increased our in-stock position in our stores and in our distribution center as well as kind of projected, based on our previous experience, what the impact would be in those markets and leaned into that and actually put additional inventory in the Houston market. And are doing the same thing in the Florida market as well as also looking for incremental locations where we feel we need to open an additional store to service those areas.

And the EPS impact, if there was one?

Yes, on the EPS side, other than the revenue -- and I would use average gross margin on that revenue to the extent you wanted to determine a P&L impact. We incurred a little bit of cost, as we just started to gear up for what I'd call the rebuild cycle, but not material amounts, and I've not tabled them out separately. We didn't take any big charges. We didn't lose any meaningful levels of inventory or anything else, so I would say de minimis amounts of incremental SG&A that would've gone with that. So generally speaking, it would be the 90 basis points of revenue at our average gross margin.

Okay. And then I know the services rollout has been helping the business and, presumably, the comps as well. I'm just curious, if you look at stores that had services for more than a year, how are those stores comping versus the rest of the base?

Yes, the installs themselves are comping double digits where they've been in place more than a year. That's that comment that I make for you guys to know that beyond the geographic expansion, how is the install business doing. We don't want to get into the specifics of that, and I've not run a subset of the stores where the installs are, but we do believe it's good for business. But I don't have a separate calculation of the comps.

Okay. And then with regard to your comment about the competitive environment, I'm just curious, can you give us a little bit more color on how your pro margins have been trending versus the overall improvement in the total company and whether or not there's an increase in in-store, on-the-spot discounts to gain that business in the current environment?

Yes, the pro business has been growing a bit faster than our overall average. The margin is very close to the average, I would say. I think we've said before slightly below, and that remains the case. I don't know that its margin trend has deviated. It's followed the base business sort of gradually higher, and some of the slight lower margin is pricing, in some cases. A lot of the time, these are quantity types of deals where we are making concessions based on volume, but, again, you're talking about a very slight lower margin, and the business is doing well.

Yes, I would just add that while -- as Marty mentioned, the mark-downs -- we haven't seen those elevate materially. There's always an opportunity for -- we don't want the associate to walk away from a sale if we feel we've got an opportunity to get that business at a profitable margin level. While we don't share our pro margins, I will tell you, quarter-over-quarter, year-over-year, it's improved, as Marty said, in line with our base margin, our total gross margin.

And the target that you set for high 30s gross margin in the medium term, just to narrow down what that means exactly. Do you think medium term is that kind of the target you'd like to get to by Q4, let's say, of next year?

I think that's the -- there's some chance of that. I'd say it's probably going to be more gradual than that. It's we're working on 20 different things, each one has got 20 basis points, let's say, and not all of them are going to click, and you get a couple of hundred basis points out of that, and it's going to be a -- we believe it's going to be a melt-up kind of approach, where each of those kind of walk our way there. Love to get there by the end of next year, but I really can't tell you that it's going to be that timely.

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

Thank you all for joining us. We appreciate your interest as we continue to build a better Lumber Liquidators, and we look forward to updating you next quarter. Thank you.

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