Tile Shop Holdings Inc (TTSH) 2014 Q2 法說會逐字稿

Greetings and welcome to The Tile Shop second-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Brad Cohen, of ICR. Thank you. Please begin.

Thank you, operator. Good afternoon, everyone. Thank you for joining us for the Tile Shop's second-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, but 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 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 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 Chief Executive Officer, Mr. Bob Rucker. Bob?

Good afternoon. Today I am joined by Chris Homeister, our COO; Tim Clayton, our CFO, and Kirk Geadelmann, who will transition into the CFO role in early August. This afternoon we announced our second-quarter 2014 results.

Given some of the macroeconomic headwinds and industry comparison points, we were encouraged by delivering a slight increase in comparable store sales during the second quarter. And we are very pleased with our two-year comp growth of 15%. The quarter finished with a total revenue of $66.7 million, an increase of 14.7% from last year.

The second quarter, as well as the first half of the year, has been impacted by macroeconomic factors weakening more than we anticipated when the year began. The very strong year-over-year growth of existing home sales that took place throughout the first three quarters of 2013 certainly played a key role in strong increases to customer traffic through our stores, which we capitalized on, driving double-digit comparable store sales growth for out the entire year.

In contrast, 2014 has seen year-over-year declines in existing home sales each month. This year has also experienced a meaningful slowdown in the growth of home values and an uptick in consumer pricing, additional factors that could be slowing remodeling activity. Many retail segments have recently noted this challenging environment.

During the second quarter, we took additional steps in our drive to become the only national chain in the tile industry, opening five stores, all of which were located in new Tile Shop markets. And since the end of June we have added two additional locations, bringing our total current store count to 100, with locations in 30 states. Our new store investments have historically proven to generate high returns, and we will continually focus on driving long-term profitability.

From a product perspective, I have made trips recently with our global sourcing team to visit both established and new vendors. A key outcome of these visits has been new product development, as well as identifying opportunities for improved production timelines on key items. Additionally, I am happy to report that we have continued to add key talent to our sourcing team during the quarter.

I would also like to again welcome Kirk Geadelmann to the Tile Shop as CFO beginning August 12. Kirk is a respected financial leader and has prior experience in the retail industry, and in working with our COO and auditors will allow for a quick and effective transition.

We are excited that he has agreed to join the Tile Shop and are confident that he will be a strong addition to our executive team. While Kirk is here with us today, he will have greater perspective and insight to share on our Q3 call, rather than today.

On behalf of the Company and Board of Directors, we want to thank Tim Clayton for all of his contributions during the past two years, including our successful transition to a public reporting Company. Tim has been an integral part of our team during a critical time of growth, and we wish him continued success for his future endeavors.

The Tile Shop continues to make progress and remains committed to providing our customers with the highest quality natural stone, ceramic, and glass tile products. We are excited about the opportunities to further strengthen our position in the industry, and extend our reach across the country as we progress throughout the remainder of 2014 and beyond.

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

Thanks, Bob.

Let me start by providing some additional perspective on our sales in the quarter. Although the positive 0.3% comparable store sales growth did not meet our original expectations for the quarter, it did represent a sequential improvement of nearly 3 percentage points from the first quarter.

And importantly, all of our largest and most well-established markets delivered sequential improvement from Q1. We believe our two year comp growth of 15% in the quarter was accelerated from Q1 two-year growth of 8%, clearly indicates the strength of our model when you combine the contrast macro environments of 2013 in 2014.

When we mention the contrasting environment between this year and last, one of the key metrics of our business is existing home sales. For those of you that don't follow this metric closely, the quarterly growth rate in 2013 was between 10 and 13 percentage points through the third quarter before falling to slight growth in Q4. In 2014, each month through May saw declines of 5% to 7% before improving to a 2% decline in June. Although many factors contribute to the growth profile of our industry, this is an important one that has not been favorable thus far in 2014.

Moving onto some of our key operating metrics, we are pleased to report that gross margin was 70% for the second straight quarter. We believe the slight modifications to our sales commission structure that we implemented earlier in the year has allowed us to establish a more consistent and stable rate, which was a key focus area for the operating teams and store leadership in 2014.

Our inventory position improved again during the quarter, as well. We finished Q2 with just a sequential design of $2.4 million and a year-over-year decline of $3.4 million, despite growing our sales by 15%. Consistent with our normal course of business, the second half of the year will see a modest build in inventory levels, but we still expect our inventory levels in 2014 to be lower than 2013 ending inventory.

We are excited about new products that have recently entered our assortment, or will in the future. We are focused on building our product offerings in key growth areas of our business, such as glass tile, faux wood and larger format floor tile, many of which will only be found in the Tile Shop due to our integrated sourcing strategy.

Our website was relaunched in the second quarter, as well. The initial changes are primarily to look and feel, as well as improvements to our mobile capabilities. In the next few months we will be adding many new functional enhancements that will be beneficial to our customers and sales teams, as the web continues to be an important touch point with our customers as they begin to research their project. We plan to open an additional eight stores throughout the remainder of 2014, totalling 20 new store locations this year, ending the year with approximately 108 stores.

Beyond the CFO change that Bob previously mentioned, we improved our organizational talent and capabilities with the addition of two key team members during the quarter that I wanted to highlight here today. We hired a marketing and e-commerce leader to lead our overall Company brand and messaging strategy, promotional planning, expanding our digital media reach and accelerating our e-commerce growth. This leader joins us with a very strong background of retail marketing, e-commerce, and providing sales organizations with capabilities to advance their market position.

We also added a new sourcing professional in China to work with our key vendors, identifying and driving potential sourcing opportunities and managing new and existing vendor relationships on a localized basis. This leader has extensive prior experience with major US companies that source heavily from China.

During the course of the quarter, I've had the opportunity to visit over 40 of our stores and interact with our sales staff to discuss how we can better serve our customers, reviewing new products, and discussing our future marketing strategies. One observation that I have seen throughout the chain is that home contractors continue to be backed up with projects that they were not able to get to earlier in the year, and fewer tile and stone projects have been delayed. We fully expect that many of these home projects will begin by consumers by the end of the year.

Although we feel we are performing well in a difficult environment for our industry, given our first-half results and tempered outlook for the second half, our full-year expectations for sales and EPS have been adjusted lower. Our teams are delivering against gross margin and spending goals we set forth at the outset of the year and a reduction for our previous review expectations resets the earnings per share that we can deliver for the year. We are pleased with the operational changes and organizational talent additions that we have made thus far this year and feel we are very well-positioned as we continue our geographical expansion.

And with that, let me now pass the call to Tim.

Thanks, Chris.

Today the Tile Shop reported net sales of $66.7 million for the second quarter of 2014, which represents an increase of $8.6 million, or nearly 15% over sales of $58.1 million in the same quarter of last year. While the revenue levels in the quarter are below our initial expectations, you should not lose sight of the fact that this is a record level of quarterly revenue for the Company.

The first six months of 2014 have certainly been challenging for our store managers and sales associates, as they were first hit by one of the most severe prolonged winters in decades, and then were presented with a sales environment that was negatively impacted by significant shifts in a variety of economic conditions. We have discussed many times that the Tile Shop is focused on, and primarily driven by, traditional home remodeling business.

However, meaningful improvements in the housing market can provide a nice upside to our business. That was the environment that existed for most of last year. In the first half of 2013, existing home sales grew by double digits in each of the first six months of the year from prior-year levels. From that point on, however, growth in the sales of existing homes began to slow dramatically, turning negative on a year-over-year basis in November with continuing year-over-year declines through this part of 2014.

Fortunately that trend is starting to reverse and the forecast is for year-over-year growth in this area in the fourth quarter of 2014. The current forecast for 2015 is for a 6% to 7% growth, which would be a nice sustainable rate of growth and similar to the environment that we anticipated heading into 2014.

Remodeling activity is also impacted by home values. When your home value is increasing, homeowners are more likely to invest in a remodeling project. In the first half of 2013, we saw significant growth on existing home values. Home values increased by double digits in each of the first three quarters of last year.

That rate of increase has slowed dramatically to a much more sustainable level of mid single-digit growth. Clearly, the spike in home values last year provided an incentive for strong levels of remodeling projects.

When you couple these factors together with the harsh winter weather from the first quarter and the follow-on effect that this has had on the timing of projects and the availability of contractors, it sets the stage for an environment where it would be very difficult to even meet the comparable store sales levels of last year in this quarter. Yet that is what the teams and the stores have achieved.

We did see a slightly positive same-store sales growth in the second quarter this year versus last year, as same-store sales grew by 0.3% in the quarter. Further, as we mentioned earlier, we are very encouraged by the two-year stack top sales growth numbers, which tends to smooth out the unusual swings in the macro environment. The two-year comp of nearly 15% would, on average, be an annual growth rate of 7% to 8%, which we believe continues to show that we are gaining share over this timeframe and reinforces the strength of the fundamental business model.

Our new stores are not immune from the economic factors that affected our older stores. While sales from stores that have been open for less than one year generated $8.4 million of sales in the quarter, this is slightly below our expectations for these newer stores.

We began the quarter with 23 non-comp stores. Four stores entered the comp store group in the second quarter, and we opened five new stores in the quarter. We ended the quarter with 24 non-comp stores, which represents nearly 25% of our total store count. However, we are now at the point where this non-comp store percentage will begin to drop 1% to 2% each quarter going forward.

Gross profit increased $5.6 million in the second quarter or 14% over the prior year. Our gross profit margin in the quarter was nearly 70%, which is virtually the same as the gross profit margin percentage achieved in the first quarter of this year and represents the fifth consecutive quarter of approximately 70%.

Our selling, general and administrative costs for the quarter were $39.5 million as compared to $30.4 million in the second quarter of last year. The SG&A costs in 2014 included approximately $0.2 million primarily related to litigation-related expenses.

A couple of items are worth noting with respect to our SG&A costs in the second quarter of 2014 as compared to the second 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 second quarter last year, and 24 stores that had been open less than one year.

As we open new stores, the store-related SG&A costs are disproportionately higher as a percentage of sales than our mature stores. This will continue to distort our SG&A to revenue percentages until the newer stores mature and until the number of new stores decreases in relation to the total store count.

One indication of the impact of our store growth on SG&A is that while SG&A costs increased 30% on a year-over-year basis, our store count increased 29% over the same period. In addition to store-related growth, our SG&A increased as we have also strengthened our leadership team since the end of the second quarter of last year, to continue to support our growth initiatives.

Depreciation and amortization expense in the quarter was $1.4 million higher than D&A in the second quarter of last year. Further, our Durant distribution center opened in the middle of 2013 and incremental SG&A costs related to that operation in the second quarter of 2014 was approximately $500,000.

Stock-based compensation costs were only $60,000 higher in the second quarter of this year versus last year. And finally, our pre-opening costs in the quarter were $425,000 this year as compared to $350,000 last year. All of these items represent necessary investments for the future of the Company. Adjusted EBITDA was $13.3 million in the second quarter, or 20% of sales.

As of June 30 we had 24 stores that were open less than one year and a total of 33 stores that were open within the past 18 months. This represents 34% of our stores, which, while operating as expected, produced results that are below the historic four-wall EBITDA margin of mature stores.

At the end of the second quarter of last year, 29% of our stores had been open less than 18 months. As we have discussed on numerous 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 prior years. We expect that this effect will begin to reverse late in 2014 as a number of newer stores becomes a smaller percentage of the total and the newer stores continue to mature.

The non-GAAP net income presentation in the press release adjusts our GAAP quarterly results by eliminating non-cash expenses related to the warrant liability, as well as other unusual or nonrecurring costs, and then applies the number tax rate of 40% to the result. This presentation results in a pro forma net income for the quarter of approximately $4 million, which translates into a basic and fully diluted earnings per share of $0.08. These amounts were computed using 51 million shares of 51.3 million shares for the basic and fully-diluted calculation.

Turning to our balance sheet as of June 30, we ended the quarter with $3.5 million of cash $94.9 million of debt. At quarter end we had approximately $20 million of borrowings available under our long-term credit facility.

As Chris mentioned with respect to inventory, we continue to focus on this area and it has resulted in a decrease of $2.4 million in the quarter, and $8.2 million since the end of last year. We expect our inventory levels will increase slightly over the next two quarters in a manner consistent with our normal seasonal buying patterns, but that year-end inventory levels will be slightly lower than at the beginning of the year, even with 20 additional stores.

Capital expenditures were approximately $12 million in the quarter, primarily related to new store build out, store remodeling, improvements at the existing distribution centers, and corporate IT investment. With respect to cash flow, the Company generated approximately $11 million of cash from operations in the quarter. Working capital changes resulted in a use of cash of about $2 million, as reductions in inventory were offset by a usage of cash for income taxes and payments of accrued liabilities.

Let me provide an update on our expectations for the remainder of 2014. As discussed above, economic factors and Q1 weather-related issues have significantly affected our year-to-date results, and we now expect the retail environment will also be softer than we originally expected in the second half of this year. Consequently, we have modified our guidance for 2014 to reflect the first half shortfall and to recognize this more challenging retail environment.

The company now expects the following for the full year of 2014: Revenues will range between $263 million and $273 million. Comparable store sales growth will be flat to low single-digit increase. New store revenue will be slightly lower than our traditional first-year levels. Earnings per share will range between $0.30 and $0.35 per share, assuming approximately a 70% gross margin and an effective tax rate of 40% and 51.3 million fully-diluted shares outstanding.

We will open 20 new stores during the year. Of the 20 stores, 14 will be in new markets and 6 in existing markets. CapEx is expected to range between $36 million to $40 million. Our expectation for depreciation and amortization remains at $20 million to $22 million. And stock-based compensation remains at $5.6 million to $5.9 million.

Finally, as I sign off, I would just like to thank the entire management team, store managers, sales associates and my staff for all of their efforts and support over the past two years. I will continue to be a very interested observer as the Tile Shop enjoys the return on the substantial investments that have been made over the past two years to grow the business.

And with that, operator, let's open the call up for questions.

Thank you.

(Operator Instructions)

Peter Keith, Piper Jaffray.

This is actually John on for Peter tonight. Thanks for taking our questions. And, Tim, we'd like to wish you well with your next venture.

For our first question, I just wanted to take a look at your new-store productivity. By our calculation, it looks like we saw a decline this quarter. We're just wondering if there was any way to give us some type of comfort that your new stores are coming out of the ground as you expected, ex the macro economic environment. And also do you have any change to your thinking around new-store maturity at this time?

I will start, and maybe Chris wants to jump in. I would say that no, the new stores are impacted in this environment by the economic factors that are affecting all the stores, if you will. We've seen that across a variety of retail sectors. We're obviously not alone in this situation.

But it does have an impact this year on the stores that had been opened in the last 12 months, if you will. So we are expecting those stores in the first year to be slightly less than the $1.8 million number.

But we don't expect that to be changing at all on a long-term basis for our stores, nor do we expect the maturity curve to be different going forward, as well. In fact, we would probably expect the stores that are opening slightly lower this year to bounce back stronger next year, given the favorable comp that they would be enjoying going forward.

Okay. And you gave us some really helpful commentary with the winter weather in Q1. For my follow-up, I am wondering if you can talk a little bit about what you are seeing regionally in Q2, high level versus what you saw in Q1? Really, has that comp gap completely closed at this point?

John, this is Chris. A little bit further color on regional performance. Our southern stores continue to perform well. It's still our strongest comp region across the country.

Sequentially, the Midwest and East Coast performed better versus the South. We've seen it normalize across the country.

We've certainly seen the weather impacts subside and abate across the country as well. And I would look at the entire chain performing as you would expect upon their vintage and age of the store, as we planned for it absent some of the macro issues that we have found and saw throughout the course of the quarter.

Okay, great, thanks. If I could just squeeze one more quick one in. As far as looking at your comp store sales, have you seen the composition between taking in transactions really change at all from Q1? Or are they even? Any commentary you can give us there?

This is Chris. I would only offer one thing on that front. We look at the size of the transaction still being relatively stable across the board.

There's no question that from a traffic standpoint, that we've seen some declines across the country in a multitude of different areas. There's no question that as I mentioned in my prepared remarks, that contractors that we're seeing come into the store are being delayed by other projects that they're completing, based upon jobs that they would not be able to complete during the winter and early spring time frame. And that certainly impacted us as far as a total traffic within our store chain.

Great. Thanks a lot. Good luck in the second half.

Peter Benedict, Robert Baird.

Tim, good luck on the new venture. First question is on the competitive environment today. Just curious what you guys are seeing on that front. Obviously after a very strong year last year, that invites new entrants or people to get more aggressive.

Have you seen anything different this year versus last year, if you take out the macroeconomic differences? Anything on the competitive front? Whether it be from the home centers, other specialty guys? What are your store associates telling you about who they're competing with?

This is Chris. I would say on the competitive side, and I think we talked about this at length as well, in the first quarter as well, is that there's no question that that we continue to compete with a broad and wide array of competitors across the country, which obviously includes the home centers, but also regional players, as well as local tile distributors and local retailers that have been embedded within the retail within that particular locale for decades on end.

When we come into a particular locale, it is a competitive environment. We certainly have a reputation for, I think, excellence from a customer service standpoint and an unprecedented assortment and breadth of assortments5. We feel obviously our return policy and pricing is right there with anyone.

From my standpoint in visiting stores across the country, I would not view the competitive environment different from the time that I've been with the Company. It's certainly robust and dynamic in many regards. That certainly includes both within the store, brick and mortar, as well as online.

I don't --from my personal perspective, I don't view it as any different from what I've seen across my time with the organization. But it certainly continues to be dynamic and robust in every way.

Thanks for that, Chris. My follow-up would be on SG&A. You talked a little bit about some of the new hires you guys have added. Can you talk about your ability to flex what levers you have, to flex the SG&A if the sales environment continues to be tough?

And then as we think longer term, let's think out towards like 2015. If the existing home sales do grow 6% to 7%, is that an environment where you guys think you would be comping in the 6% to 7% range? And if that were the case, would you be leveraging SG&A next year as opposed to if you're leveraging as you are doing right now?

Let me start with that, Peter. This is Tim. The increase in SG&A that we've seen is really driven by the increase in our stores and investment in expanding out the footprint. And we continue to think that that's an outstanding investment for the Company, given the long-term returns that those stores have.

If you look at our, as I think I mentioned, the growth in SG&A is almost directly proportional to the number of new stores that we have, looking at rent, occupancy, depreciation, and compensation in those stores. There's probably not a substantial amount of levers from that standpoint in terms of reducing and flexing. There are some things you can do on the margin to address that SG&A growth.

But we continue to think and continue to believe that the investment in the stores that we are making, especially in the markets that we're moving into, are going to prove to be very valuable investments in the future. And well worth the investment that we are making today.

That's fair, Tim. The last question on that would be do you think 20 stores is a level we should be thinking about longer-term as we look out beyond this year? Is that a good number? Or do you think it goes up or down?

Peter, this is Chris. Certainly we don't have any further guidance to talk about pertaining to 2015. Certainly we're committed to 20 stores for this year.

I think as you've noted in our release, that it's been fairly equal from an equal distribution standpoint across the board, with five in the first quarter, five in the second. We've opened two within this quarter. Certainly on our way to a very equalized distribution of 20 stores within the chain.

I think as we look at 2015, and certainly we will talk further about this as the year goes on, we would look at a variety of different factors of new-store performance as well as the macroeconomic environment we find ourselves in as well. I can certainly state on the call though, that the range that it will be, certainly will not be any larger than 20. And I think we'll continue to look at where our best use of capital is best applied as we go into 2015.

That's helpful, Chris. Thanks a lot.

Seth Sigman, Credit Suisse.

The guidance for flat to low single-digit comps for the full year seems to imply a little bit of an improvement in the second half. Is it fair to assume that Q3 is off to a little bit better start than where you were tracking in the second quarter? Any other color on how to think about Q3 versus Q4 comps?

Seth, I think you are right. I think obviously if you look at the six-month numbers, we're slightly negative for the six months year-to-date. So for sure that kind of comp guidance would anticipate better performance in the second half of the year.

I think we've chatted about a number of factors that we think are, and have affected, the first half of the year. I think in a number of those cases we've indicated with the weather affected things that are start to coming back obviously third and fourth quarter, as well as improving some of the macro environments.

And, frankly, there's some easier comps as we get later in the year. All those things will, I think, imply an improvement towards the later of the year that makes us feel comfortable about that revised guidance.

And then you've discussed the delay in certain projects and certain spending. Can you just elaborate on that? Are you seeing the traffic come into the store, but just not executing on the transaction? Or could you explain what you're seeing there?

I think it's a couple of things. And one of the things that we've heard, and Chris could probably expand on this, given his recent trips out to talk to a lot of the different stores. But a lot of the things we're hearing is that the contractors are backed up, the installers just can't get to the projects quite yet.

All that has had a trickle-on effect, if you will, with delaying out these projects. Now we get to the summer months, kids at home, it's much more of an interest to wait until that after school starts, pre-holiday season to get these projects implemented.

And just a question on pricing. I know you guys have made some changes in pricing over the last couple quarters.

What was the net effect of that in terms of the ticket? Did it effectively bring down the ticket a little bit more? Did it sharpen the pricing? I'm wondering how that impacted you guys.

Seth, it's Chris. There's a couple things going on. One, certainly on discounting. When you're discounting your product less, your sales -- ticket actually goes up. We've had that impact, certainly and that's proven itself across the board.

We have certainly been sharper on price points where we felt that we needed to have an opening price point on a commodity SKU, such as the white subway tile, to be competitive with local, regional and national players across the board. I don't view -- the combination of the two, I don't view it having any tremendous impact, positive or negative on ticket size based upon our pricing actions.

So net effect is pretty neutral?

Yes.

Daniel Moore, CJS Securities.

Can you give a sense of the comps as they trended monthly through the quarter and what you're seeing so far in July?

Dan, it's Chris. On the April, May and June, we'll provide a bit more color. April was a positive month for us. I'm not going to go into any detail on any of that.

May was negative and June was positive, equating obviously to the 0.3%. I think Tim already touched upon the outlook for the rest of the year.

It was certainly a bit choppy as we came out of the weather-impacted areas. It was a bit difficult from our standpoint of forecasting some of the demand that was happening across the chain as the impacts of the weather abated throughout the course of the chain. Hopefully that's helpful to you.

You've recently remodeled several stores in Minnesota and other Midwest markets. How many are you in the mid -- have you or in the middle of remodeling? And how many of the older legacy stores do you plan to remodel in the next 6 to 12 months?

We've discussed this in the past. We touched approximately 20 stores per year. We're more than midway through that point at this point in time. We'd like to have all of our remodels done through -- to essentially take advantage of the traffic that we see within the store in the fall timeframe, as people look to take care of projects that they want to get done before the holiday period.

That continues to be an excellent investment for us. The remodels that we have on older stores continues to have a high rate of return, based upon new products that we bring into the market. And also creating marketing events around the store while it continues to be refreshed with new products coming from all different parts of the world.

So nothing unusual? Not an unusual spike there?

No.

How much did the change in comp structure impact comp store sales, if at all, in the quarter?

We don't feel it had any negative impact pertaining to comp store sales or total sales across the board. The comp plan modifications that we did earlier in the year have, we feel, been immaterial from the standpoint of sales growth.

As we mentioned on the phone call, we do feel that it has had a material impact on stabilizing the gross margin rate. And having both gross margin and sales, total sales, as being a few key components for the sales associate to look at when they're actually closing that sale. We view it as a net positive to the Company, for sure. And feel it's been well received within our sales organization.

You mentioned you still have $20 million of liquidity availability. If comps don't improve, how comfortable are you in your current liquidity? What kind of environment and what options might you consider exploring to enhance flexibility to continue to grow if comps don't pick up over maybe a slightly longer period?

Dan, I guess I'm not maybe quite sure what you're asking there. We're comfortable where we are with our liquidity and the availability, and our relationship with our bankers.

Everything is -- there's absolutely no issues there from that standpoint. Given where our plan is and even that it provides us complete comfort under that facility, we could always -- I hate to go down a what-if type of thing.

Obviously we open 20 stores a year and that's where we spent most of our cash. So that would be an easy lever if we needed liquidity, but we don't see that happening. Frankly, we think we will be generating meaningful excess cash next year over and above what's needed to fund our CapEx program.

Just wanted to hear the reminder. Never hurts. Tim, thank you for all your help. That's all for today.

(Operator Instructions)

Anthony Lebiedzinski, Sidoti and Company.

I was hoping that you could perhaps share some comments on the performance of some of your smaller stores, like Lincoln Park, for example.

Sure, Anthony, this is Chris. We've talked about Lincoln Park in the past. It opened on March 24 of this year and continues to have high-traffic volume, as well as right on track pertaining to its performance as an urban store.

We certainly will continue to have other smaller-footprint stores across the chain. We view this as an opportunity for us to have reduced capital expenditures. We feel the sales volume will be just as robust, especially in markets where we're in a capacity and looking at it from our standpoint of having a densification strategy within certain markets.

You'll see another small format store coming to the Chicagoland area as well, not an urban setting, but more of a suburban area. You could look at that as a positive of how we look at store footprint as an opportunity for us as we go forward in our store build-outs, as a model that we're very pleased with so far.

As far as your performance of your new stores, I think Tim may have mentioned that this year it's, as far as your new stores likely will do, bit less than $1.8 million dollars for sales in the first year. As far as the expected four-wall contribution, is there any comment you can share with us?

With respect to our first-year stores?

First-year stores, yes.

Anthony, we've -- if you looked at our normal maturity curve, first-year stores on average would be about a 10% EBITDA margin for the full year on a normalized basis. So the only guidance I would give you if our expectations for them to be slightly lower this year, that that would be slightly lower as well.

Okay, just checking in on that. As far as the year-over-year gross margin decline, is it similar factors as the first quarter of this year?

Yes. Because I think the year-over-year decline was, I think, maybe 50 points or something like that, 40, 50 basis points. It's a variety of things that go into that. It's some cost increases, mix shift. It's Durant. It's a number of factors, none of which are really very significant.

How many store leases have you signed for next year? I'm just curious.

Anthony, I don't -- we'd have to check into that. I'm not sure we're getting into a disclosure at this stage of the commitments that we're entering into for next year, so --

My last question is just wanted to clarify something. In your press release, it was showing last year's results for the second quarter. The press release from today shows for the second quarter of 2013, 53.259 million shares.

If I go back to the press release from last July 30, you are showing a diluted share count of roughly 51.7 million shares. Did something happen? I know you had the warrant outstanding, but that's last year's discussion. Just wanted to clarify what's the share count that we should be looking at?

The share count that you have in the current year is probably the most representative because it doesn't have all the noise that we had in the numbers from last year, which was not only the warrants that significantly were exercised or were redeemed between the second and third quarter. But we also had some warrant repurchases and some share repurchases late in the second quarter of last year, as well.

So I think last year there was an attempt to get a normalized type of presentation for the EPS numbers, so that we could take that noise out of it. And the numbers in the schedule this year tie exactly into what our weighted average diluted share count was in our GAAP presentation.

Joe Feldman, Telsey Advisory Group.

Wanted to ask a couple questions. One was getting back to the macro picture in housing. As you guys have looked at the different data, how much -- and I know you're talking about existing home sales being the bigger driver, but how much did just home values come into this? Like people reinvesting, as you mentioned in the call, to remodeling, versus somebody moves or buys a new house, not necessarily a brand-new build, but an existing home? You know what I mean?

I'm trying to get a sense. I thought we were a little more project-oriented that just reliant on turnover.

Absolutely, Joe. In fact, if you -- in my prepared comments, I think I called out two things. The first is, we talked about existing homes and in that commentary indicated that the Company is primarily a remodel-oriented Company and that meaningful movement in existing home sales can provide a nice upside to that core business.

But to your point, I also talked about the core business, the remodeling business, being affected meaningfully by the value of a person's home. And that does have a -- I think, a psychological impact, and an actual impact on their interest in doing some remodeling project.

If the value of the home is going up, there's much more interest in doing that kind of investment in your home. As I think I talked about, if you look at those numbers last year, the growth in home values last year were up double digits for the first three quarters of the year.

So it was a meaningful spike in the improvement of individual home values. That has moderated since that point to a more stable 3% to 4% increase in values going forward. But it definitely had, I think, an effect on last year's remodeling activity.

That's helpful. And then one other unrelated question. Wanted to ask you about the new website and some of the mobile enhancements. Can you talk about -- I guess does it change the way you plan to market with consumers? Or is it just easier functionality for the consumer to interact? How the new marketing guy will interact with this, and what the goal is to drive through the website?

Hi, Joe, this is Chris. The marketing woman will drive -- she'll have responsibility for obviously all of marketing and e-commerce. We certainly look at the web as not atypical to any other omni-channel retailer out there, is that the web is an important commerce tool. But it's also an important element for us to introduce the Tile Shop to a customer.

And given the fact that we are in so many new markets where the Tile Shop is new to that particular consumer, it's our first opportunity to really wow them with the inspiration that we feel that certainly have within our store. But also to have them and give them an understanding of the inspiration that we have in the visualization of the vignettes, but also the broad breadth of product that we have, as well.

We will certainly look at the web as a continued enhancement of our e-commerce strategy and e-commerce revenue. We certainly expect that to continue to grow over the course of time. And the enhancement that we have from a website standpoint around stability, displaying images and through 1080p resolution.

The mobile site enhancements of having a great experience on a 9.7 tablet or a 4.7 screen or a 5.8 screen. Those are all important elements that we didn't have before from a scalability standpoint.

As we go forward, and as I've mentioned in the past, having the ship-to-store capabilities, having the ability for us to speak dynamically to a customer based upon where they live and their distance to a particular store, I think are really important aspects that will narrow the gap that I think that we have right now versus some of our competitors. And also where we have enough to leapfrog about how we can actually go to market, given the fact that we do have 100 stores. And also, I think, a very robust website now that we can lever well into the future.

I view it as an opportunity to showcase products, introduce the brand. But then also to [invite] commerce, especially in states that we're still not in, which is obviously still 20 states at this point in time.

Thank you for the update and good luck with this quarter, guys.

Thank you. I'd now like to hand the floor back over to Management for closing remarks.

Thank you for joining us this afternoon. Have a good evening.

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