Tile Shop Holdings Inc (TTSH) 2013 Q2 法說會逐字稿

Greetings and welcome to the Tile Shop second-quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brad Cohen of ICR. Thank you, Mr. Cohen. You may begin.

Thank you, operator. Good afternoon, everyone. Thank you for joining us today for Tile Shop's second-quarter 2013 earnings conference call. Let me remind you that certain statements made during the call today may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Words such as not limited to, plan, expect, anticipate, believe, goal, estimate, potential, may, well, might, could, target, and any other similar words to identify forward-looking statements may be made.

Such forward-looking statements are subject to both known and unknown risk and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the earnings press release issued today and the Tile Shop's latest filing with the SEC. The forward-looking statements made today are as of the date of this call, and the Company does not undertake any obligation to update these forward-looking statements.

Also during the call today, the Company may be discussing adjusted EBITDA or EBITDA, which are non-GAAP financial measures. Please see the Company's earnings press release issued for a reconciliation of these non-GAAP financial measures to net income, the most directly comparable GAAP measure. If you do not have a copy of today's press release, you may obtain one by linking through the Investor Relations page on the Company's website at www.tileshop.com.

With that, I will turn the call over to Tile Shop's Chairman of the Board, Mr. Bill Watts. Bill?

Good afternoon. I am here with Bob Rucker, the Company's Founder and CEO; Carl Randazzo, Senior VP of Retail Operations; and Tim Clayton, our CFO. Before I review some strategic initiatives at the Company, I want to start by discussing the highlights of the second quarter.

Same-store sales increased 14.3%, exceeding expectations and representing a very nice sequential increase over the 10.4% achieved in Q1. The two key drivers of our comps are, first, the macroeconomic tailwinds driven by improving consumer confidence and increasing housing turnover. Secondly, continued outperformance by the new stores.

In terms of earnings guidance, we are reaffirming our previous EBITDA expectation of $60 million, but we now are going to accomplish this while incrementally investing above and beyond original expectations in two key areas designed to further enhance the long-term growth rate of the Company.

The first is new stores. The number of new stores we expect to open in 2013 is up to 20 from 17. Carl will provide details on where we stand up against that new objective. Let me focus on why we are opening more stores.

First, results of the 24 new stores opened since January 1st of 2012 are consistent and meeting all expectations. Second, with the ongoing infrastructure investments being made throughout the Company, we are confident that we can support the additional growth. Bob will give you detail on the scope of these infrastructure investments.

A little more color on the 24 stores that have opened since January 1st of 2012, and by the way, 10 of them are in new markets with 14 in existing. Keep in mind that the stores opened in new markets have virtually no brand awareness and were opened with limited marketing and advertising support. Even so, these new stores are meeting expectations under these circumstances, which lead us to conclude that the value proposition is compelling and resonating with consumers once they experience our stores.

The increase in our range of new stores, again 17 to 20, coupled with the second-half weighting, 13 in the second half versus 7 in the first half, will cause some reduction in EBITDA margins in Q3 and Q4 as we have consistently explained on past calls. Tim will provide you with more detail.

Looking forward to 2014, we currently anticipate opening approximately 25 stores. Beyond 2014, rather than looking at a fixed percentage of new store growth, we will focus on ensuring the new stores continue to meet expectations while also expanding our infrastructure capabilities to be consistent with the number of stores that we open.

The second strategic initiative is based on the success of the Tile Shop value proposition, not only in the new stores but across the system. In this regard after an extensive search, we retained a Minnesota-based advertising agency -- Pocket Hercules is their name -- and have charged them with running tests in select markets over the balance of this year.

We are building the test programs around the following opportunities. First, consumers truly appreciate the Tile Shop retail experience once they have interacted with it. Remember, approximately 50% of our business is repeat sales. Our goal is to try to externally communicate the essence of that retail experience, that being our broad assortments, unique presentation and knowledgeable salesforce to a wider audience, designed to increase traffic in our stores and at our website.

The second thing we want to try is that our top volume stores have a higher percentage of business done through professional tile installers. We want to organize programs to reach out and establish additional relationships, possibly some form of loyalty program with installers throughout the retail network. Third, the Company has historically like all retailers run promotions on major holidays -- Labor Day, Black Friday, etc. We want to improve the returns on these promotions.

Against these initiatives, the Company plans to proactively spend approximately $1 million in the third and fourth quarters, which will be slightly dilutive to margins, but again we believe this investment long-term will further strengthen the Tile Shop brand and distance us from our competition.

To summarize, we are reiterating our earlier guidance of $60 million of EBITDA, but will now absorb the incremental costs of three additional stores as well as the $1 million investment in the advertising test I just described.

Let me now turn the call over to Bob Rucker, the Company's founder and CEO.

Thank you, Bill. Let me start as always by giving you an update on purchasing, pricing and supply chain. In terms of pricing, we see pockets of cost pressure on [trade] and to a lesser degree in product, but nothing we see as significant. The dollar has actually strengthened in certain markets, namely Turkey and India, and has stabilized in China.

Let me tell you again we continue to pursue the world markets to ensure that we can now and in the future supply our expanding store base. To that end, we have added a full-time person on the ground in Mexico and India to search out new suppliers, mainly in the stone category, which represents over 50% of our sales.

We also continue to work with our existing suppliers to expand production. Given our knowledge of the markets, we believe we are up to the challenge of feeding our growth. This is a core competency.

Let me now focus on infrastructure where we have made major investments in order to stay ahead of our projected store expansions. Specifically, our Durant Distribution Center has now started shipping to stores. The setting material manufacturing at this facility will be completed by October 1. We expect to be shipping 18 stores from the facility by year end. With the Durant DC open, we can comfortably handle at least 200 stores with the existing four distribution centers.

We have expanded our cabinet shop to accommodate the construction of cabinets for the 60 vignettes in each new store. That department is located in Spring Valley, Wisconsin. The additional capacity now gives us the capability to support up to 40 new stores per year.

Our sample board department. To supply the approximately 1700 display boards at every new store, we recently completed a major expansion of the display department located in Ottawa Lake, Michigan. This gives us capability to produce enough display boards to support up to 40 new stores per year.

The home office. We have added 22 additional associates across the support functions at the home office in Plymouth. While I'm not a big fan of overhead, I realize we have to continue to expand these areas ahead of the expected store growth. Specifically, we have added people in IT, sales support, merchandising, purchasing, accounting, marketing and human resources. In sales, Carl has already added one additional regional manager and will add one more next month, bringing our total to four.

In addition, he has added three full-time training people which are former store managers and whose job it is to spend two to four weeks with each new store staff as the stores open. This has led to better productivity in the new stores, and again gives us confidence that we can support the planned growth.

Internet sales. While our online business is not yet that significant, it is growing rapidly. Therefore, we have added three full-time customer service representatives that all have prior Tile Shop store experience to better capitalize on what may evolve into a meaningful part of our business.

Let me now turn the call over to Carl to give you more color on the retail business.

Thank you, Bob. Let me say again how proud we are that comp store sales were up 14.3% in the second quarter, and total sales were up 25.59%. From the data we have available, two-thirds of the sales growth was driven by ticket and the other one-third by increased store traffic.

Our strategy for continuing to grow sales is built on four pillars. First, opening stores in markets with suitable demographics. Second, leveraging our strength to take market share from the competition. Third, offering a vast selection of products incredibly presented to grab consumers from the moment they walk through our doors. And fourth, early training our sales managers and their associates to deliver exceptional customer service.

Let me now provide an update on new stores. We are well on our way toward meeting our goal of opening 20 new stores this year. During the second quarter, we opened 4 new stores. These include 1 in Warwick, Rhode Island which continues to boost our presence in the Boston market; another store along the Baltimore-Washington DC corridor in Glen Burnie, Maryland; a store in Greenville, South Carolina; and our first store in Texas located in the Dallas suburb of Plano.

In addition to these 4 new stores, so far this quarter we added another store in Dallas and a store in the Baltimore suburb of Timonium. So as of today, we have opened 9 new stores so far this year.

In addition, we currently have 4 more stores under construction and an additional 7 leases signed. In other words, all 20 of the projected openings are already accounted for.

As we continue our aggressive growth plans, we understand that part of our success rest with our sales managers who set the pace for our stores. To ensure that our sales managers are positioned to succeed, we have initiated a mentor program to get new managers up to speed faster and to focus them on serving our customers. This is a major contributor to the success of the new stores.

Lastly, Bill's earlier comments on enhancing our marketing efforts. We are testing marketing programs in three test markets this fall with our new agency, Pocket Hercules. Having worked with them over the last 90 days, I am confident that it will result in incremental traffic and sales in our stores and through our website. These initiatives are planned to kick off on Labor Day.

With that update, I would like to turn the call over to Tim Clayton, our CFO.

Thanks, Carl. We are very pleased to report net sales of $58.1 million for the second quarter of 2013, which represents a 25.5% increase over sales of $46.3 million in the second quarter of last year. The $11.8 million improvement was driven by a 14.3% increase in comp store sales, which accounted for $6.6 million of the increase. The remaining increase of $5.2 million were from sales of these 16 new stores that have been opened during the past year that were not in the comp store base.

We opened 4 new stores in the quarter and 2 stores entered the comp store group during the second quarter. The 14.3% growth in comp store sales represents a meaningful improvement over comp store sales in the second quarter of 2012 of 3%, as well as an improvement from the same-store sales increase of 10.4% achieved in the first quarter of this year.

For the six-month period, our comp store sales increase is 12.4%. This is on top of a 6.4% comp store sales improvement in the first half of 2012. The increase in sales for the first half of 2013 was $22.8 million. Of this, the comp sales increase was $11.4 million and new stores contributed $11.4 million, also.

Gross profit increased $7.2 million or 21.4% for the second quarter compared to the prior year. Our gross profit margin of 70.3% was lower than the prior year, but continues to be in line with the expectations previously communicated. When comparing our gross margins to the prior year, we have seen slight increases in product acquisition, freight and distribution costs.

In addition, we have used selective product-related promotions and shipping discounts to generate or secure incremental sales. All of these actions are specifically designed to drive traffic and enhance customer satisfaction. In view of our overall strong gross margins, we believe that an aggressive approach to capturing market share while impacting gross margin slightly in the short-term serves to enhance our long-term prospects.

Importantly, these actions have not adversely impacted our EBITDA margin. Our selling, general and administrative costs for the quarter on a GAAP basis were $30.4 million as compared to $22.6 million in the second quarter of last year, an increase of $7.8 million. As a percentage of sales, our SG&A costs in the quarter were 52.3% of sales compared to 49.1% in the second quarter last year.

The SG&A costs in 2013, however, include the following items that were not incurred in 2012. First, we have 14 more stores than in the second quarter of 2012, as well as a full quarter of costs associated with 2 additional stores that we opened during the second quarter of last year.

As we open new stores, the store-related SG&A costs are disproportionately higher as a percentage of sales than on a normalized basis. In Q2 of 2012, we had only 5 more stores than in the second quarter of 2011.

Second, public company and unusual transaction-related costs. In addition to incurring normal public company costs in the quarter, we also had our share of unusual nonrecurring costs related to the recent secondary offering, the warrant exercise and redemption process that occurred at the beginning of the quarter, and the 1.9 million share repurchase that was implemented with the cash proceeds from the warrant exercises, and even some costs related to the initial merger transaction that were billed in the quarter. The total of these unusual nonrecurring costs was $785,000 in the quarter.

Third, stock-based compensation costs of $1.2 million were recorded in the second quarter of this year, with none last year. Fourth, the cost of the 22 new people that we have hired since the completion of the merger, as well as other similar costs that have been incurred to support the more rapid growth of the Company. We believe we have achieved the necessary staffing levels to support our growth plan, and that future quarters will see a much more normal increase in these areas.

Adjusted EBITDA in the quarter was $15.8 million, which represents a 16.6% increase over adjusted EBITDA of $13.6 million reported in the second quarter of 2012. Adjusted EBITDA for the first half of 2013 was $32.2 million or a 17.3% increase over the first half of last year.

Our adjusted EBITDA margin in the second quarter was 27.2%, which is approximately 200 basis points down from that same margin of 29.3% achieved in the second quarter of 2012. Again, this decrease from prior-year margin levels is in the range we expected.

Let me take a minute to discuss two items that will affect our EBITDA margins for the remainder of the year. First is the seasonality of the business. As we have discussed before, the first quarter of the year has traditionally been the home-improvement quarter for our business, and we see higher sales proportionately during the first quarter each year as compared to later quarters of the year.

In this regard, the third calendar quarter of the year is our seasonally slowest quarter. The second and fourth quarters have been relatively consistent. Over the past two years, this seasonality has been masked somewhat because of the number of new stores that we have opened throughout the year.

However, the underlying seasonal buying patterns of our customers remain in effect. The effect of these seasonal patterns is that we get leverage on our SG&A costs in the first quarter of the year, which results in a higher EBITDA margin in that quarter, and we see the opposite adverse impact on our EBITDA margins in the third quarter of each year.

The second item that is affecting our EBITDA margin percentages relates to our new store opening. As you know, when we open a new store, we incur on average $80,000 of preopening costs for that store. In addition, the new store generates lower four-wall margins for up to six quarters.

To quantify this, the typical new store will generate on average a 3% four-wall margin for the first quarter that it is open. The margin will then increase to approximately 25% after six quarters of operation on a reasonably ratable basis. This EBITDA drag represents an important investment today that will produce substantial returns for the Company in the years ahead. However, when you add a lot of stores in a short period of time, the impact is that these new stores will temporarily adversely impact our EBITDA margins.

In this second quarter alone, we had 18 stores that were in pre-open stage or open less than one year, and another 8 stores that were opened within the past 18 months. Nearly one-third of our stores are in pre-open or ramp-up mode. We will add another 13 stores in the second half of 2013.

As we have said before, as the number of newer stores increases in relation to the total number of stores, the EBITDA drag will adversely impact our EBITDA margins. The most significant effect of this will be in the third and fourth quarter of this year, but it will continue to impact the 2014 quarterly results, however, to a lesser extent.

As a result of these seasonal and growth-related dynamics, we would expect our EBITDA margins to range between 23% and 25% in the third and fourth quarters of this year.

The second quarter was a busy one also with respect to equity activity. We started the quarter by calling for the exercise or redemption of the remaining outstanding warrants. We then took the action to address share demand by implementing and completing a secondary offering, which moved approximately 4.9 million shares from the former Tile Shop ownership group to new public shareholders. We completed the trifecta by utilizing $46 million of the cash we received from the exercise of warrants to repurchase approximately 1.9 million shares of stock from our major shareholder.

As a result of these actions, we have now firmly established our outstanding share base at 50,852,974 shares. There are also 295,000 restricted shares issued and outstanding that will vest over the next two years. There are no warrants outstanding.

In addition, over the past year we have transitioned our ownership group and substantially increased our public float. We currently have approximately 50% of our outstanding shares in the public float.

In order to provide a basis for more normalized historical results, we have included in the press release a pro forma non-GAAP net income presentation which adjusts our GAAP quarterly results by eliminating the non-cash expense related to the warrant liability and the unusual transaction and nonrecurring costs in the quarter, and also utilizes a more normalized tax rate of approximately 40%.

This non-GAAP pro forma presentation results in a pro forma net income for the quarter of $6.4 million, which translates into basic and fully diluted earnings per share of $0.13. These amounts were computed using 50.9 and 51.7 million shares for the basic and fully diluted calculation, respectively. The 50.9 million shares used in the basic calculation represent the actual number of common shares outstanding as of June 30, 2013, excluding only the restricted shares outstanding which have not yet vested.

The fully diluted share amount of 51.7 million shares includes the dilutive effect of outstanding options and the restricted stock. These amounts should represent a stable basis for our basic and fully diluted share counts going forward.

With respect to the balance sheet at June 30, we ended the quarter with approximately $3.8 million of cash and $75 million of debt. Our long-term debt to trailing 12-month adjusted EBITDA leverage ratio as of June 30 was approximately 1.4 times. At quarter-end, we had approximately $23 million of borrowings available under our long-term credit facility.

Cash flow from operations in the second quarter was a use of cash of $3.6 million, as we added substantial amounts of inventory to prepare the new distribution center for operation. Capital expenditures in the quarter were $11.1 million. Approximately $7.4 million of that was for new store buildout and remodels of existing stores, $3.2 million was for expansion of our distribution facilities, and the remainder was for corporate purposes.

Capital expenditures for 2013 are expected to range from $37 million to $40 million, which primarily include store-related CapEx and CapEx related to the expansion of our manufacturing and distribution capabilities.

Notably, in the past week we closed on our tax incentives related to our investments in the Durant Distribution Center, which will result in $3 million of cash for us. We will use this cash to offset the CapEx costs of the new setting and maintenance material manufacturing operation that is currently under construction at the Durant distribution facility. The cash for the tax incentive program has been offset against our estimate of CapEx for the year that was discussed above.

As indicated earlier, we are raising our guidance with respect to the number of new stores that will open this year to 20 new stores. Also, as previously indicated, we expect to exceed the original revenue guidance of $222 million for the year. Our current expectation is that our revenues will be between $227 million and $237 million.

We continue to be comfortable with the expectation of $60 million of adjusted EBITDA for the year. This includes the effect of 3 incremental new stores and the $1 million investment for advertising tests that were discussed earlier.

With that, let's open the call up for questions.

(Operator Instructions) Peter Benedict, Robert W. Baird.

It is actually Justin Kleber on for Pete. Thanks for taking the question. Congrats on the quarter. First off, thinking about the store growth longer-term, you mentioned I think 25 stores next year but maybe not fixating on a target going forward. Bob had mentioned some of the investments that you have made to support, I think, up to 40 stores.

So I guess the question I have is do you guys feel that you have the team in place today to add 40 stores per year, or is that going to require additional human capital and infrastructure investments going forward?

This is Bob Rucker. I would say we are set up very well for what we are anticipating next year. I think the infrastructure we have built now with maybe very incremental growth of personnel could reach that 40. I don't think we are going to need much. I think the basis that we have put now will stretch quite a ways.

Okay. And then obviously, the category, I think is pretty hot right now. So just maybe on the competitive dynamics in the marketplace, are you guys noticing any other of the specialty players in the space trying to also ramp their unit growth? Are you running into them in real estate discussions, etc.?

Not really, but competition exists in all of our markets. It just varies by degree from one market to another. But we feel very confident in our model, and we feel it allows us to compete head-on with a variety of competitors, from the big-box stores to the global distributors. But I think that is our attitude going into these markets.

In fact, Carl, when you go into a market, you do go as close as you can to the competitors. We try to be across the street.

Yes, if that allows us.

It will drive traffic for us.

I mean, that has kind of been our mantra going forward.

Okay. Tim, just a question on the gross margin. You mentioned some of the pressure points. Can you maybe just help us rank order the magnitude of what is driving the decline? And then are you still comfortable then in that 70% to 72% range, or do you think that gross margins maybe slip a little bit more in the near-term as you are really going for market share at this point?

Well, I guess, Justin, that is a good question because we are still comfortable in that 70% to 72% range. We may be at the lower end of that range, but to your point and I think what is really important to focus on is that if you look at our gross margin reduction year-over-year of 240 basis points, our EBITDA margin only dropped 210 basis points. And that includes all of the public company and infrastructure costs.

So we are clearly gaining some of that leverage as we go after this share to improve our business. And as Bob has said 1000 times in the year that I have been here, we won't lose a deal, but we are going to do it smartly. I think you see that coming through. We see some discounts, we see some shipping promotions. Those types of things are working to help us gain share and improve our top line.

So it sounds like that is probably the bigger driver than the pressure that you are maybe seeing on the freight or the product acquisition cost?

I would say that is fair.

Okay. Thanks, guys. Best of luck.

Seth Sigman, Credit Suisse.

Great, thanks, and congrats on a good quarter. I had a couple follow-up questions on some of the tests that you mentioned. I guess first, can you maybe elaborate on some of the changes that you are thinking about making on the advertising front? I know historically it has been a low percentage of your sales. How do you think about how that could maybe change over time?

Well, I just want to clarify, we haven't done anything yet, that we are kind of looking at a few markets to test our advertising in. We are always -- we are looking at all options like we have stated. We are going to test a lot of different mediums in a few different markets, and measure the results and decide how we want to move forward in the future.

We will keep you posted as we see anything by the next quarter, the next two quarters at least, whether there is some traction here or not. We don't know yet.

Okay. I also just wanted to touch on the comment you made about the pro-installers. You mentioned that in some of your better stores, it seems like that is a little bit more of an established business.

How does that relationship work today with those installers, and is there a way to quantify the opportunity from growing that part of the business?

Usually as time goes on, we create a larger base of installers just through being in the market, our store managers getting to know the local installers. That is important because that does drive our mainstay homeowner customer in. If we have the support of the contractor, that raises that clientele.

What we are looking at is ways to speed up that process in the new stores. So we are looking at that with some of this advertising to see how we can market to them to pick up the pace, rather than just let it happen naturally.

Okay, got it. Thanks and good luck.

Ms. Joan Storms, Wedbush Securities.

Hi, everybody. Congratulations on a great quarter. Great sales momentum. So I guess heading into the third and the fourth quarter as we know you have some pressures on adjusted EBITDA, but how are you feeling about the new stores you are opening and the sales momentum continuing?

The comparisons get a little bit tougher, but can you guide us a little bit to comp for Q3 and/or Q4, or just two halves overall?

We are not giving any guidance on comps, but as Tim mentioned -- this is Bill Watts -- that we have now increased the range of revenue for the year to $227 million to $237 million, so you will have to back into the comps. In terms of your first part of your question on the new stores, what has impressed me and continues to impress me now after looking at this for a little over a year is the consistency of these new stores.

It almost doesn't seem to matter whether they are in existing markets, new markets. They just are performing right on the expectations in either situation. And again, I think that comes back to the strength of the retail concept and the consumer experience once we get them into the stores.

And remember, half the business once you get going is repeat business, so this is part of why we are so enthused about the external marketing test with Pocket Hercules; can we do things to proactively move the dial a little bit quicker.

Then just as a follow-up on you guys have commented earlier in the call, as well in your comments, about that you are starting to see some benefit from some of the macroeconomic conditions. And some of us that follow you also follow some of the home goods retailers and home furnishings versus some of the remodeling sort of projects.

So in most of the home goods, home furnishing companies have said that they really haven't seen any real benefit yet from the economy. So I was wondering if you could delve into that a little bit more, and obviously — and maybe comment too about -- obviously, you are going after more contractors -- about the whole DIY comment?

Again, the two macro trends that this company has historically followed are the consumer confidence and housing turnover, not new housing starts but housing turnover. Housing turnover assumes we get remodels. That is what is behind the business. Both of those trends are continuing upward.

So we can't directly connect the dots, but the assumption is that those two macro trends are certainly contributing to the acceleration in revenue and comps that you are seeing.

Okay, thank you very much.

Daniel Moore, CJS Securities.

Thank you, appreciate it. It looks like average ticket was up close to double digits. It is kind of a follow-on question, but how much of that would you attribute to the success of the sales professionals in upselling, and how much from those improved macro trends that you just mentioned?

I'm not sure we can relate it to either one. We can just simply tell you what it is. And as Carl said -- Carl, why don't you jump in here?

I think we have always focused on -- our number one thing in training with any new person up to a veteran player in the store is get as much as you can on the ticket. It is good for the customer, it is good for the salesperson, it is good for the Company.

If the customer can go home with everything they need, then they went to the right place. And anything they don't use they can bring back, but they usually use most of it. But no, we really focus on getting as much -- getting as many full tickets as possible. And if those were the numbers, then we did a pretty good job in doing that.

And secondly, based on the guidance for 2013 and assuming you hit the 25 new stores next year in 2014, should we think about some recovery in EBITDA margin next year or should we expect margins to remain sort of down in that 23% to 25% range, given new store opening costs, maybe some additional advertising, etc.?

Dan, what I would tell you is that we talked about that 23% to 25% range really relating to the Q3 and Q4 numbers here. Going forward, we are going to have some impact to the new store, this EBITDA drag that I talked about, in Q1 and Q2 next year as well, but not nearly to the same extent.

We will have some margin compression next year from these types of things. We have talked about that from the beginning, that that was one of the factors that was going to affect our EBITDA margins by 200 to 300 basis points. So yes, you will still see some of it going into 2014, but as we said before towards the end of 2014, in the last part of that year, we do expect to see some leverage being obtained over all of these different items as we continue to grow.

That is helpful. And lastly just to clarify, the spending for advertising, is it $1 million a quarter in the back half of the year or $1 million overall for Q3 and Q4?

It is just $1 million in the aggregate.

Okay, thank you.

John Baugh, Stifel Nicolaus.

Thank you and good afternoon. I was wondering as you get bigger, you mentioned product procurement costs were up slightly. Is that currency, is that mix? I would think you might get a little leverage on that as you get larger with your primary vendors.

There is not a lot of currency issues in that from that standpoint. We are pretty large with our vendors as it is. I'm not sure how much — we have never really communicated the expectation that we are going to have some margin expansion because of our incremental purchasing power.

Incrementally, you have some cost raises in freight; it ebbs and flows. You have some currency changes. Like right now, I stated that the dollar has actually gotten stronger in a couple of countries. Over the last few years, the dollar has gotten weaker in China, but that has stabilized.

All in all, it has been pretty quiet the last quarter. And going into the future now looking at costs, I would say we are able to keep up with any cost increases by incrementally also increasing sales prices. So we are in pretty good shape there. I don't see anything dramatic.

And the reference, I think it was in gross margin again, the higher distribution costs. Is that solely a function of the additional DC, or is there something else going on?

No, I think it is really just incremental people moving more product around, is part of it. The new DC hasn't really come online yet. That will come online here in the third quarter.

Okay. And then finally, could you just give us a feel for the stores next year, the mix of new versus existing? Thank you.

New markets compared to existing markets? It's hard to say right now, but I can give you — I mean, we are going to continue to look in Texas, continue to expand in Colorado.

It has been running historically close to 50-50, probably no reason to assume anything different.

Right.

Great, thank you.

Joe Feldman, Telsey Advisory Group. Oh, pardon me one second — Anthony Lebiedzinski, Sidoti & Company.

Good afternoon. A couple of questions. First, on the higher traffic, are you able to convert more people into buyers? I just wanted to get a little bit more detail as to what is driving the traffic. Is it just the macro factors, or is it anything else that you are doing?

Again, we don't know exactly, so we assume it is the macro factors. And the numbers that Carl was quoting isn't traffic into the store, it is number of transactions. We don't know into the store versus converting.

Okay, got it. Okay. And a couple of questions in regards to just new stores. For 2014, should we assume that new stores will open at a similar pace as to what you have opened as far as your 2013 store openings?

Pretty evenly, yes.

Again, I think from what Carl has told us, so we are in very good shape to finish this year. He already talked about that. And the amount of locations and leases in the pipeline also looks very good. So it looks like you could assume ratably, it would be the right way to go.

Also, just looking at the second quarter, was wondering if there was anything unusual at the timing of the new store openings. As I look at the delta between total sales and same-store sales between first and second quarters, it looks like there was a little bit of a slowdown in terms of just that difference between, again, total sales and comp sales, even though you did accelerate your store growth.

We are accelerating the number of stores, as we've talked about, from 17 to 20. But in the first half of the year, you also recall that we opened 15 stores last year. And so that took some of the timing. In the quarter, the stores opened more towards the second half of the quarter than kind of ratably over the quarter, so that would have had an impact.

And that was the same issue in the first quarter, so both of those probably would have had an impact on how you might model out the new store revenue component of our sales.

Got it, okay. So for this quarter, you have already opened 2 in July?

Right.

Right, and then there's 4 more under construction that will open within the quarter for sure.

Right.

Thank you.

Joe Feldman, Telsey Advisory Group.

Good afternoon. So a question about -- you guys mentioned that you put two new people on the ground in I think India and Mexico to help source stone. And I guess I was wondering is that a signal of you need more stone, effectively, to support the stores? Are you concerned about your current infrastructure from a supply network, or is it -- I guess how should we think about that?

No. This is Bob Rucker. It is basically business as usual. We are constantly looking to find new supply. We have actually been in India for years, but we are digging in deeper and we feel we can use a person there to dig.

Mexico, we pulled away from it several years ago because of transportation problems, but the supply there is very good and we want to get back into it. So we have a Spanish speaker, a Mexican national, on the ground there digging for us, but it is really business as usual.

Just like we have been over the last years moving away from our concentration on China and moving into Vietnam, moving into Indonesia, diversifying.

Right, makes sense. Okay, and there is some quality stone in those places, so that make sense. I guess on sort of the accelerated store growth, I know it's not a huge number to go from 17 to 20, but for you guys at a small base, it kind of is.

And I am just wondering why accelerate the stores to bring in earlier? I get it that they are terrific stores, but you guys kind of have a nice, steady controlled growth, and I'm just curious as to why you would want to speed it up a little bit.

It really comes down to -- it is Bill Watts -- to two things. They are working and they are consistently working, and we now are really comfortable with the infrastructure as Bob outlined that is in place to make it happen. So the question becomes, why not?

Got you. And another question I had was you guys had talked a little bit about gaining share, which is terrific, and I have no doubt you guys are doing it. I guess I was just curious how you are measuring that. Are you guys looking at a particular data source? And I guess how it is just being benchmarked, just so we can kind of maybe on the sell side start tracking that as well.

There isn't definitive data, so here is where — we know we are gaining share because with our revenue up 25%, we know the industry is not growing anywhere near that level, i.e. we are gaining share. But until we get data at the end of the year, I can't give you much better than that. But we know the industry is not growing 25%.

Got you. And then the last thing I wanted to ask you guys is -- and I agree with you, I'm sure you guys are gaining share. But the last question was on the marketing. You guys said you have three different kinds of tests, and I was wondering if there is any more color you would be willing to share at this time, what those might. Is one like a loyalty program and one is just more straight-up advertising, or what are the differences maybe?

Like I said earlier, the different mediums we are looking at is across the board. We are going to test a bunch, see which works, and put into place which ones gives us the best results.

Yes, it is still a work in process. This all kicks off on Labor Day, so we are not sitting here looking at any results at this point. All we know is we are going to do it, and we thought it prudent to let you know as investors that you are going to see some different things in several markets.

Got you. Thanks, guys. Good luck with this quarter.

Daniel Moore, CJS Securities.

Thank you again. When should we think about beyond Durant, Oklahoma? Are we two years away from thinking about adding that next distribution facility, or too early to contemplate at this point?

We are looking right now, Dan -- this is Bob Rucker. My goal is to reach across the country, and I see that eminently possible. We are looking for sites right now to cover that West Coast. Right now, we are looking in some specific areas and if we find the ideal site, we will latch onto it and develop it. But we want to be able to reach that entire West Coast.

And would you need to get to a certain level of critical mass in Durant before you would go ahead and begin construction there?

I would say this, we are looking now. And the type of sites that we are looking for, if we can find a cost-effective one, I think it would be prudent for us to take and then decide when to actually kick it in gear. Right now, as I said, Durant will be at 18 by the end of the year, and that is all prime turf for Carl to find new stores in '14. In fact, we have got quite a few of those in the hopper so to speak that we are dealing on.

So I would say I think we have great potential to raise our number of stores serviced. It gives us a lot more fruit to pick out there, Durant does, and the West Coast from Washington, Oregon all the way down through LA and San Diego, is just great territory.

Great, appreciate it.

Thank you. Ladies and gentlemen, that does conclude our question-and-answer session. I would now like to turn the floor back over to Mr. Rucker for any closing comments.

Thank you for joining our call today. We are proud of our progress and look forward to updating you on our next call. Have a good evening.

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