Tile Shop Holdings Inc (TTSH) 2014 Q1 法說會逐字稿

Greetings. Welcome to the Tile Shop first-quarter 2014 earnings 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.

I would now like to turn the conference over to your host, Brad Cohen. Thank you Mr. Cohen, you may begin.

Thank you operator. Good afternoon everyone. Thank you for joining us for Tile Shop's first-quarter 2014 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, will, 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 risks 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 in The Tile Shop's latest filings with the Securities and Exchange Commission. 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 release issued for a reconciliation of those 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 to 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 Chief Executive Officer, Mr. Bob Rucker. Bob?

Good afternoon. Today, I am joined by Chris Homeister, our COO, and Tim Clayton, our CFO.

As we discussed in February, the first quarter of 2014 presented a unique challenge from much harsher than normal weather across much of the country. As is evident from numerous reports and company results, this certainly had an impact throughout much of the retail industry. For The Tile Shop, this impact was amplified farther because the majority of our stores are located in the Midwest, mid-Atlantic, and East Coast markets.

Looking forward, what we are very encouraged by is the month-to-month improvement we are seeing in customer traffic and sales as winter concludes and spring begins. The quarter finished with positive comparable store sales growth in March, helping to bring the total revenue for the quarter to $64.4 million, an increase of 13.3% from last year.

During the first quarter, we took further steps in our drive to become the only national chain in the tile industry opening five stores with four stores in new markets, and one store in a current market, a smaller format urban store that opened in the Lincoln Park neighborhood in Chicago. Since the end of March, we have added two additional locations, bringing our total current store count to 95. And we are now located in 30 states.

Additionally, an important milestone on our path to growth was reached during the quarter as we signed a lease for our 100th store location. This milestone has special meaning to me because when I started the business in 1985, one of the goals I set for the company was to be able to create a chain with 100-plus locations. Our new store investments have historically proven to generate high returns, and we will continually focus on driving long-term profitability.

We are always looking for additional ways to increase the availability and assortment of our product offerings, and during this quarter, we made significant strides in this area. Initial product shipments from two new quarries began in the quarter, providing additional operational flexibility and diversity. There were numerous other accomplishments in the first quarter regarding gross margin, inventory, and organizational talent. The Tile Shop is making progress and remains committed to providing our customers with the highest quality natural stone, ceramic, and glass tile products. We are enthusiastic about the opportunities to strengthen our leading position in the industry and broaden our reach across the country as we progress through 2014 and beyond.

I would now like to turn the call over to Chris Homeister for a further discussion of results and key initiatives.

Thanks Bob. Let me provide some additional perspective on our sales in the quarter. The negative 2.3% comparable store sales decline was a result of slower customer traffic which we believe was almost entirely a result of extreme weather that Bob just discussed.

While we do not typically share monthly or geographic core comp sales data, we feel it is appropriate to share a bit more color this quarter that highlights the severity of weather conditions that we saw throughout most of the country. Our Midwest stores, where the winter was most severe and frankly historic in many respects, had a mid-single-digit decline in the quarter. In the mid-Atlantic and East Coast markets that also experienced historically poor winters, our comps were approximately flat. Our stores located in more moderate, Southern geographies had very encouraging results including the Atlanta, Charlotte, Raleigh, Lexington and Jacksonville markets, delivering high single-digit comparable store sales growth. These more southern stores currently account for less than 15% of our comparable store sales, meaning more than 85% of our comparable store sales were within markets meaningfully impacted by weather in the quarter.

We have previously discussed the fact that weather has a multifaceted effect on our business. But given the impact we firmly believe it had in the quarter, I will quickly summarize it again. Weather impacts customer traffic to browse and order, can slow our ability to get product orders from our distribution centers to stores, and finally can delay the completion of sales from customers taking longer than normal to pick up their purchase. This can potentially result in a more compounded impact than perhaps felt at more traditional cash and carry retailers.

Moving onto some of our key operating metrics, we are very pleased to report that gross margin, a key focus area for the operating teams and store leadership in 2014, improved sequentially 100 basis points from the fourth quarter, reaching approximately 70% in Q1.

Our inventory position improved more than anticipated as well as we finished the quarter with a sequential decline of nearly $6 million, increasing year-to-year at a much slower rate than our growth in store count. Despite the normal course of inventory builds expected in the latter stages of the year, we now expect our ending inventory in 2014 to be slightly lower than 2013 ending inventory.

I would now like to briefly discuss a handful of notable operational changes that were implemented during the quarter that should continue to positively contribute to our results as we move forward. First, in February, we implemented a the new sales commission pay structure that compensates our associates for not only gross profit dollars they deliver but also creates upside opportunity based upon their gross margin performance. This further encourages them taking advantage of our full range of product assortment accessory pieces and finishing materials that we can offer to our customers. It also has driven a more disciplined promotional discounting activity in our stores.

At new stores, we are continuing with a newly implemented compensation structure to reduce unwanted turnover during the early stages of a store's growth curve. This allows us to more effectively and efficiently develop sales talent and create stability at the store level to drive the success of our model going forward.

Additionally, we took multiple actions on pricing. First, we made further refinements to our pricing within competitive markets to attempt to proactively defend our market share. Second, we made adjustments to all of our Thinset pricing to be more competitive on an important product category that we manufacture ourselves.

We plan to open an additional 13 stores throughout the remainder of 2014, hurdling 20 new store locations this year, ending the year with approximately 108 stores.

We also increased the depth of our leadership team with two key acquisitions of talent during the quarter that I wanted to highlight here today. We have hired a director of global product sourcing and merchandising who will be focused on creating product category strategies, developing and sourcing new products, assortment planning, pricing and deployment of merchandising strategies. This leader joins us after having extensive international sourcing and merchandising experience with leading retailers.

We are also bringing on board a leader for our new export trading office in China who joins us from an internationally recognized accounting firm. This leader will play a vital role in overseeing the transactional activity with our Chinese vendors, driving potential sourcing efficiencies, and managing better relationships on a localized basis.

Although we are encouraged by the positive shift in sales momentum as the quarter progressed, we do feel it's prudent to slightly modify our full-year expectations on sales and EPS. Although historically sales have proven to be deferred rather than lost when affected by circumstances such as weather, the magnitude of what occurred in the first quarter this year is too meaningful to assume a full recapture during 2014.

Weather aside, we are very pleased with the operational and organizational improvements made during Q1 that further establishes a foundation for continued success in the future. And with that, I will now pass the call over to Tim.

Thanks Chris. Today we reported net sales of $64.4 million for the first quarter of 2014, which represents an increase of 13.3% over sales of $56.8 million in the same quarter of last year. As Chris mentioned, the unusually adverse weather in our key markets during much of the first quarter was the primary cause to a drop in same-store sales of 2.3%, or about $1.3 million.

Sales from stores that have been open for less than one year generated $8.8 million of sales in the quarter, even though these stores were also impacted by weather to a meaningful degree. We began the quarter with 24 non-comp stores. Six stores entered the comp store group in the first quarter, and we opened five new stores in the quarter. The six stores that enter the comp store group in the first quarter were all in the upper Midwest or Northeast. We ended the quarter with 23 non-comp stores, which represents nearly 25% of our total store count.

With respect to the comp store performance in the quarter, it is important to reiterate that the comp store performance improved each month throughout the quarter with March achieving low single digit comp store gains despite the fact that the first week of March saw severe winter weather across much of the Midwest and Northeast. What provides us with additional confidence that weather was the cause for the revenue shortfall is that our Southern stores continued to show strong comp store gains during the quarter, poating high single-digit increases over prior-year levels.

Finally, I think it's noteworthy to point out that our same-store sales growth in the first quarter of 2013 was a strong 10.4%.

Gross profit increased $4.6 million or 11.3% in the first quarter compared with prior year. Our gross profit margin in the quarter was nearly 70%, which represents a 100 basis point improvement over the gross profit margin in the fourth quarter of 2013.

We have started to see the results from the actions that were put in place during the quarter related to more discipline surrounding discount activity and the changes in the commission structure which Chris discussed earlier. The differences in the gross margin in the first quarter of 2013 are due primarily to product cost increases and the inclusion of the Durant, Oklahoma distribution center that opened in the middle of 2013.

Our selling, general and administrative costs for the quarter were $38 million as compared to $28.4 million in the first quarter of last year. The SG&A costs in 2013 included approximately $1.1 million related to nonrecurring items, primarily special investigation costs. On an adjusted basis, our SG&A costs in the first quarter were $36.9 million or 57% of sales compared with 62% on an adjusted basis in the fourth quarter of last year. This sequential improvement is a nice indication of the leverage that is achievable as our stores mature.

A couple of other things are worth noting with respect to our SG&A costs in the first quarter of 2014 as compared to the first quarter of 2013. First and most significantly, at the end of the quarter, we had 22 more stores than we did at the end of the first quarter of last year and 23 stores that had been open less than a year. This represents 25% of our store count at quarter end.

As we open new stores, the store related SG&A costs are disproportionately higher as a percentage of sales than for our more mature stores. This will continue to distort our SG&A to revenue percentages until our newer stores mature, and until the number of new stores decreases in relation to our total store count. One indication of the impact of our store growth on our SG&A is that while SG&A increased 31% on a year-over-year basis, our store count also increased 31% over the prior year.

In addition to store related growth, our SG&A increased over 2013 as we have also strengthened our leadership team since the end of the first quarter of last year to continue to support growth initiatives.

Depreciation and amortization expense in the quarter was $1.4 million higher than D&A in the first quarter of 2013. Further, our Durant distribution center opened in the middle of 2013 and our SG&A costs related to that operation in the first quarter of 2014 were approximately $850,000.

Stock-based compensation costs were $300,000 higher in the first quarter of this year than last year, and our preopening costs in the quarter were $425,000, as compared to $300,000 in the first quarter of last year. All of these items represent necessary investments in the future of the company.

Adjusted EBITDA was $13.8 million in the first quarter, or 21.5% of sales. As of March 31, we had 23 stores that were open less than one year and a total 30 stores that had been opened within the past 18 months. This represents 32% of our stores which, while operating fully as expected, produced results that are below the historical EBITDA four-wall margin levels of our mature stores. At the end of the first quarter of last year, 26% of our stores had been open less than 18 months.

As we discuss on many occasions, there will be an EBITDA margin drag as the number of newer stores increases in relation to the total number of stores. With the expected opening of 20 stores in 2014, this drag effect will continue to impact 2014 results, albeit at a lesser rate than in the prior year. We expect that this effect will begin to reverse late in 2014 as the number of new stores becomes a smaller percentage of the total.

One more item with respect to store performance and specifically our newer stores. Absent the effect of abnormal weather situations, we continue to see our new stores generating on average $1.8 million of revenue in the first year of operation. The growth percentages after the first year generally continue to be in line with our expectations.

The non-GAAP net income presentation in the press release adjusts GAAP quarterly results by eliminating non-cash expenses related to the warrant liability as well as other unusual nonrecurring costs, and then applies a normal tax rate of 40%. This presentation results in pro forma net income for the quarter of approximately $4.4 million, which translates into basic and fully diluted earnings per share of $0.09. These amounts were computed using 51 million shares and 51.5 million shares with a basic and fully diluted calculation respectively.

Turning to our balance sheet as of March 31, we ended the quarter with $4.3 million of cash and $93 million of debt, which is an improvement of approximately $2 million from the end of last year. At quarter end, we had approximately $20 million of borrowings available under our long-term credit facility.

Shifting to inventory, I am also pleased that the focus on more effective management of inventory, coupled with the normal seasonal inventory delivery patterns, results in a $5.8 million decrease in inventory at March 31. This will continue to be a focus area for the company in 2014 and we expect our year-end inventory levels to be slightly lower than at the beginning of the year, even with 20 additional stores.

Capital expenditures were $12 million in the quarter, primarily related to new store build-outs and store remodeling, but also included improvements at our existing distribution centers and corporate IT investments.

With respect to cash flow, the company generated $15.2 million of cash from operations in the quarter. Working capital changes generated about $4 million of cash in the quarter as reductions in inventory and the utilization of our income tax receivable were offset by reductions in accounts payable. It is important to note, however, that this level of cash flow was sufficient to fund our capital expenditures in the quarter and pay down some debt.

So, let me provide an update on our thoughts for the remainder of 2014. Since the initial guidance we provided in February, the weather effects on our business were much more pronounced than originally anticipated. Consequently, because of the adverse weather situation, we have modified our guidance for 2014 to basically incorporate the first-quarter shortfall into our full-year expectations. Said another way, we expect the remainder of 2014 to be generally in line with our original expectations for the final nine months of the year. However, as a result, the company now expects the following for the full year 2014 -- revenues to range from $280 million to $290 million; profitable store sales growth in the range of 4% to 6%; earnings per share to range from $0.41 to $0.45 per share, assuming an approximately 70% gross profit margin, an effective tax rate of 40%, and 51.7 million fully diluted shares outstanding.

We will open 20 new stores, of which seven are already opened. Of the 20 new stores, we expect 14 to be in new markets, six to be in existing markets.

CapEx is still expected to range from $36 million to $40 million, and our expectations for depreciation and amortization and stock-based compensation are not changed.

And with that, operator, we can open the call up for questions.

(Operator Instructions). Seth Sigman, Credit Suisse.

Okay, thanks, and thanks for all the color on the different sales drivers through the quarter. Maybe just a focus on some of the operational drivers, so I think Chris mentioned the change in the comp structure. Obviously a tough quarter, but any early reads on how that's changing the behavior in the company, and maybe how the consumer is responding to some of those behaviors? Thanks.

This is Chris. Thanks for the question. The comp plan change that we have committed at the beginning of February we would view as being a positive influence for the company across the board. We feel that we will be able to drive a consistent pricing pressure with consumers across the country. With over 90 stores now, we feel that that was an important change that we needed to make to our compensation structure to give you a consistent pricing pressure across the country and across the chain so a consumer can have relative degrees of insurance than what they see in Minneapolis is the same they'll see in New York, that they'll see in Atlanta.

I would also say that, from a comp standpoint, it has also proven to be an important driver for behavior within our sales associates where they have an additional incentive to improve not only gross margin dollars but also gross margin rates. We think the couple -- those two changes together is a positive outcome for the company at this point in time.

And as you think about the margin improvement that you saw in the quarter, can you maybe just elaborate on some of the promotional tactics that may have changed from the fourth quarter, some of the umbrella promotions that maybe you were running before or any specific categories that I think you alluded to before? Thanks.

So the promotional levers that we have really begun at this point in time have just begun. So as I mentioned before, in Q4, we made pretty dramatic changes away from moving away from broad-based umbrella type promotions across the lines of products that we had in Q4. Within Q1, we really began the beginning stages of implementing our targeted marketing approach and being targeted to consumers of when they are actually active in the marketplace. So, we've begun building the model. We've parted consumers, have actually won their shopping in the marketplace. We are serving them an ad when they are actually going out to the site or sites that we feel are good corollaries to their purchase behavior and actually when they will purchase.

A specific example I would target around what we are doing in Lincoln Park. One of the things we mentioned and that Bob mentioned on the call is not only talking about the store opening but also looking at how we actually can identify those customers in a geo-targeted manner around this particular store, in that store in particular in Chicago, and serving them and ad and providing not only a dynamic ad but also looking at where can serve a video ad for them as well and actually get to a point where we can actually target them on a specific promotion or on a specific product category based upon their research that they are doing online as well as what they might be doing in store as well.

Okay, thanks. I appreciate it. That's very helpful. One more and I'll jump off. The comps, it sounds like they were up low single digits in March. Care to share what they were doing January and February before they inflected positively?

I think the comment was that the trend improve throughout the quarter, and so I think you can kind of judge from that the winter weather was purchased in January and kind of continued on. But from that standpoint, the trend was an improving trend throughout the quarter.

Okay. Thanks guys. Good luck.

Jon Berg, Piper Jaffray.

Sorry about that guys, sorry about the background noise here. Thanks a lot for taking our questions. Given that you comped negative in Q1, is there any way you could give us maybe a little additional color on April just to get us a little more comfortable with that 4% to 6% comp guide for the full year? And at this point are you seeing the gap between geographies close?

I'll touch on that. I think April is kind of as expected at this point. We don't really want to go into a lot of detail from that -- obviously you can understand and appreciate that. But you know, we feel it's kind of on track.

The other question in terms of closing of geographies, I have to take a look at more detail on that. I don't -- I haven't rolled it up from a standpoint of individual weeks in the month that kind of show that closing of the gap, if you will. I can tell you that we are very pleased with how the Southern geography stores performed in the first quarter with the high single-digit comp, which obviously also gives us comfort that when customers can get to the stores on a consistent basis, we can deliver that kind of comp improvement.

Okay, great. Thank you. And then I guess how should we really think about the weather impact on business for the remainder of 2014? We knew obviously traffic was hurt in Q1 from what happened in the Midwest and the Northeast. But how long do you feel that -- is the demand really pushed out or lost, or what have you guys seen in prior years with the company?

I think historically, as I think Chris mentioned, is that the sales on a normally -- a normal seasonally impacted or weather impacted period of time would be deferred from a month-to-month standpoint, or maybe a couple of months as opposed to being lost in total. We've seen a lot of information kind of in the press related to how this significant weather in the quarter may have changed some of the consumer buying patterns, and that's why we are just being a little cautious in terms of the revisions in our year-end guidance, full-year guidance, and basically taking what we were short in Q1, and basically adjusting our full-year guidance just to incorporate that shortfall with the expectation that the rest of the year will continue to perform as we originally had expected the year to perform. If there is more revenue that is deferred, if you will, as opposed to being lost, then we should see some favorable opportunities there.

Okay. And then one last quick one from me and then I'll hand it over. Congratulations on signing your 100th store lease. That's a great accomplishment.

But just thinking about your store openings for the rest of the year, five in the first quarter, it sounds like you got two down in the second quarter already. How should we think about the pacing of the openings throughout the rest of the year?

This is Chris. The store openings will be fairly balanced throughout the course of the year. So as we mentioned in the release, we've opened five in the quarter. We've opened two already in this quarter. I think you can anticipate that we will certainly be in the five to six range for Q2. And then the back half of the year is fairly equal between the two quarters as well.

Okay, great. Good luck in the second quarter, you guys. Thank you.

Peter Benedict, Robert W. Baird.

Thanks for taking the question. First, Chris, just on the pricing changes that you were talking about earlier, it sounds like those are initial price points that I guess you're trying to get more consistent across the country. I don't want to put words in your mouth, but let me know if that's correct. And then how does that jive -- I know in the past you guys have talked about different markets having different competitive situations and customers maybe in the Midwest being more focused on getting a discount whereas maybe in the Northeast you don't need to do that. Does that just continue to be a factor? You just want to start from the same place in terms of pricing? Help me understand that. Thank you.

Certainly, we certainly want consistency across the board. There's no question about that. I think there is a lot of benefit from that and especially being an omni-channel retailer like The Tile Shop is, the Internet continues to be an important element. And we certainly don't want to broadcast to the consumer that there's different prices within the store and also within the Internet pricing from that standpoint. With that said, we continue to have market pricing within -- inherent within areas of the country that have other or maybe more pronounced competitive threats from each local marketplace. So that has continued. And the number of markets that we have from Q4 to Q1 has been relatively consistent from that standpoint.

And then I would just look at, on a marketing standpoint, actually communicating price, we felt that we could be sharper on price on certain categories in order to signal a price impression to consumer, to test some of the contextual display ads and video ads that we are rolling into the marketplace, eventually having a price impression at opening price point, really ring true to a consumer and get them excited where price might be a barrier. It's certainly only one part of our value proposition, but certainly we felt, in some areas where we could test and have an opportunity to move through inventory or to -- have an opportunity where we are actually maybe going into a new market, such as Chicago I mentioned or as we went into Arizona or New Mexico, those are important marketing tactics that we want to take advantage of. And we felt moving price on a few select SKUs within certain categories within our broad product assortment of over 4000 SKUs was appropriate.

Okay, that's helpful. And then Tim, you talked about the story of bad wind reversing later this year. Do you expect that to flow through fully to the consolidated EBITDA numbers so that we would see on the consolidated numbers maybe an improvement year-over-year in EBITDA margins in the fourth quarter? And then related to that, as you think about longer-term opportunities, you said in the press release you continue to believe the business will get back to those prior margins. Can you give us a sense of maybe how many stores you think you need to have operating in order to get the business back to that level? Thank you.

That's a multiple. I would first expect, given the dynamics of the costs associated with new stores as they open and how those stores mature, that I would expect to see improvement in the EBITDA margins in the fourth quarter year-over-year as those percentage trends start to reverse. I think the real leverage comes in probably Q1 of 2015 as we've said for quite a bit as that's been a seasonally stronger quarter. And I think we have some very strong leverage opportunities there as well.

Clearly, our goal is to get back to that 28% EBITDA margin type of number. You know, we are several years away from that I think, but we are clearly going to be making strides, meaningful strides, towards that as we get into 2015. And I think I don't have a specific number of stores, Peter. We'd have to take a look at where we think that might play out. But I think, within the next two or three years, we should be approaching, maybe even sooner than that, approaching that 28% number.

Okay, perfect. Thank you Tim.

Daniel Moore, CJS Securities.

Good afternoon. Thank you. You mentioned Lincoln Park new store being smaller, urban. Talk about whether that's a model you expect to replicate in other areas. And is there any difference in the economics, given potentially higher rent and other expense relative to your sort of bigger box model?

We are certainly excited about Lincoln Park. We opened it on March 24. We've had a great initial reaction from the local community in the Chicagoland area. And Chicago, as you all know, is an important market for us in general.

The economics of the store are not materially different from other stores. We certainly have other stores within the chain that have rent structures that are similar to Lincoln Park. Given the fact we are on the East Coast in a fairly material way. But what I would say is that we feel that the square footage of that particular store, which is around 14,000 square feet, is a model that can certainly work for us in many geographies, not just an urban setting. We think the opportunity for us of what we've seen thus far, and also I might add as well that Lincoln Park, there are other stores that are similar size within the chain as well. They are about that same size. So it's not the smallest store in the chain from a square footage standpoint, but it's certainly the first store that's really in a true urban setting.

So, the things that we are testing from an operational standpoint are certainly, one, is the economics, but number two and number three are more some of the operational elements of it, of how do we get large heavy shipments into an urban setting market. Do we need to change our delivery cycle? Do we need to have localized delivery, not just your doorstep but to your apartment or to your condo. How many flights of stairs do we want to go up. I think those are things that for the first time we've really had to go through from an operational standpoint.

And again, going back to my opening statement, I feel that the early read on the store from both a foot traffic standpoint, sales, and overall receptivity to our concept and to the presentation that we have within the -- that the Tile Shop brings to the community has been very, very positive thus far.

Very good. And you mentioned the change in commission structure, the shift that went in in February. Do you think that had any adverse impact on revenue, on comp store sales in the quarter?

We don't. Tim and I have both stated that we have had sequential improvement throughout the quarter. The comps have improved every quarter from a month standpoint since the program has been in place. So, we don't actually feel it's been a mitigating factor at all. As we've mentioned time and time again through the release as well as the call that we felt that missing the plan from a comp standpoint was largely due to the weather, and also a hole that we had from very severe to relatively severe to better conditions throughout the quarter, and given the store locations of not having a national footprint on the West Coast or the Deep South and even in the Southeast where they had weather as well, it wasn't high enough to offset the large percentage of stores that we have from our comp base in weather impacted markets.

Excellent. And finally, maybe you just update us on the transition over the past few months in terms of procurement, supply chain in the new export trading company, where -- if you think you are sort of -- put that all behind at this point and just kind of where we stand in terms of that transition.

Yes. I think we're almost there. I think, as I mentioned on our release, we are very excited about having an individual that will be based in Beijing to lead our China export trading office. We feel that she will be a great addition to the team. And once that is up and running, and we feel that will be up and running within the second quarter, we feel that will be the last step in the process of putting that capture in the rearview mirror.

Very good, thank you.

(Operator Instructions). Kate McShane, Citigroup.

Thanks, good afternoon. Just going back to the supply chain, I wondered if you could update us on any changes in the supply chain or where you are sourcing tile from, and what level of inflation are you seeing and expecting for 2014?

The supply chain continues to be relatively consistent. Certainly, China and Turkey remain very important countries for us from a country of origin standpoint with Southeast Asia and South America, Central America all being important elements for the company as well. We are very excited about how Mexico can be an important country that will be adding to -- for our supply -- our supply chain across the board. We received our initial shipments from quarries within Mexico during the quarter that Bob spoke about, which are very encouraging and we think that could be a tremendous outlet for this that we haven't used up to this point in time.

Pertaining to inflation, there is inflation that I think we have spoken to within the comments here today. We feel that it's been well-managed by the teams here, and we feel that in many cases we are able to pass it along to consumer where appropriate. Certainly, in some areas where what I would classify as commoditized product, that may not necessarily be the case. But in general, given the fact that we have a broad assortment across many different countries, I feel that we are somewhat more insulated than maybe some other players out there.

Okay, thanks. My last question is -- not to beat a dead horse because I know you've given a lot of detail around your pricing actions and refining some of your price -- but can you talk a little bit about the competitive environment and what you're seeing from some of your closest competitors, especially now you get to the 90 stores and opening in new markets, what kind of the more recent reaction has been?

I think we talked about this last quarter and certainly have to talk about it here again today that with 90 stores and certainly growing to over 100 by the end of the year, we are a noticeable presence when we go into any market. And given the fact that we compete against a wide variety of competitors in the marketplace, including local stores that might have one or two in the market that have been in business for 30 or 40 years, regional players that have a loyal following, and then certainly national players of both big-box stores as well as other players in the marketplace as well, we felt -- we continue to feel that our pricing is in line and very competitive across the board. And then as I mentioned before, we felt we had an opportunity to become sharper on price in certain SKUs within product families where we could promote a price impression in a marketplace that would allow people to get to know The Tile Shop, and also get to know what we represent so they could come to the store and see what we are about or come to our website. And I think we are very pleased with how that has driven traffic, and I think also got an introduction to The Tile Shop for here is that we are brand-new to you, which is a fairly large percentage of our stores.

Thank you.

Anthony Lebiedzinski, Sidoti and Company.

Good afternoon. I just had a quick question about the previous comment that the expectation is that eventually the company will get back to that EBITDA margins of around 20%. So looking back historically, you did that type of a margin in 2010, 2011. The gross margins were over 73%. So with that in mind, is the eventual goal of getting back to those types of margins, is it because the gross margin will get back to 73%-plus versus 70% now, or will this come only because of leveraging SG&A expenses?

I think as we mentioned, our target range for the gross margin is the 70% to 72% range. We've seen stabilization, and we think there's opportunity for improvement in the gross margin from where we are. I think the majority of the return to that type of EBITDA margin level is going to come to leverage off of our SG&A as we continue to mature the stores and add more stores to the company across the country. And that's really where the opportunity comes in on a longer-term basis.

Okay, thank you.

We have time for one final question in today's Q&A session. Joe Feldman, Telsey Advisory Group.

Hi guys, good afternoon. Thanks for taking the question. It's really just a follow-up to something that was commented on earlier. I guess I wanted to go back to the pent-up demand issue. And I guess I was under the impression that this space had pent-up demand that would kind of unwind. And I guess what you're saying today is a little different, and I'm curious as to why that wouldn't be still the case where there would be this pent-up demand and there would be maybe a little bit of a boost in the second- and third-quarter sales to kind of get you back onto the sort of trend line, so to speak.

I think what we are saying is that while we believe in many markets that there is this pent-up demand, we've also seen some things which we think could offset that somewhat as are people going to be spending money on improvements to repairs, are they going to do home improvements. And we're just a little cautious until we see that pent-up demand kind of flow through in a more consistent manner perhaps. I think all you're doing here is trying to be maybe a little cautious or conservative, and just reflecting the first quarter into the full-year results and really saying we think the rest of the year will be as we originally expected the year to play out when we first looked at the plan in early 2014.

Got it, that makes a lot of sense. Thank you for that, guys. Good luck with this quarter.

At this time, I will turn the floor back to Mr. Rucker for closing comments.

Thank you, folks, for joining us tonight. Good night.

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