Tile Shop Holdings Inc (TTSH) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Tile Shop fourth-quarter 2014 earnings call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Adam Hauser, Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning to everyone on the call and welcome to The Tile Shop's fourth-quarter earnings call. Following our prepared remarks, the call will be open for analyst's questions. Questions will be limited to analysts, and we would appreciate if participants would limit themselves to one question with one follow-up.

As a reminder, 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, estimate, 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 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.

Today's presentations may also include certain non-GAAP measures. Please see the Company's earnings release for a reconciliation of those non-GAAP financial measures, also available on the Investor Relations section of our website at investors.tileshop.com.

With that, let me now turn the call over to our Chief Executive Officer, Mr. Chris Homeister.

Thanks, Adam. Good morning, everyone. I'm here with Kirk Geadelmann, our CFO. And we appreciate you joining us today as we report our fourth-quarter and full-year results, and share our outlook for the year.

As we discussed in our earnings release, the environment remained challenged during the fourth quarter. But due to a variety of initiatives implemented during the quarter, we were able to finish the year within the range of outcomes we discussed in our last call. Whether assessing other retail peers, manufacturers, or other industry survey data, 2014 was not a strong year of growth for the retail floor and category.

We discussed a relatively dramatic swing in existing home sale growth from the strong positive increases experienced during 2013 to this mid-single-digit decline experienced throughout much of 2014, which we believe weighed on remodeling activity and customer traffic throughout the course of the year. Sales for the quarter were $63.3 million, representing growth of 9.5%, while comparable store sales during the fourth quarter were flat. For the full-year, our sales grew 12% to $257.2 million, and comparable store sales growth was approximately flat for the year as well.

While we were disappointed that we finished at the low end of the earnings guidance, we have been pleased to see the beginning of strong sales momentum across much of the chain since December. As we look back at the fourth quarter specifically, there were numerous accomplishments that our team successfully delivered that I'd like to mention as we continue to invest in our organization.

First, we launched our market manager program that covers approximately half of our store base, leveraging and incenting accomplished senior level store managers to drive growth, reduce turnover, and lead talent development at the market level. During the course of 2015, we fully expect that all stores will have market manager support to significantly assist in the development of our staff, share best practices across the market, and ultimately drive and improve performance in each market.

With the market manager structure in place, we saw meaningful sales associate and store manager turnover declines from Q3 levels, with Q4 representing the lowest store level turnover rates of the year. Average store manager tenure had a meaningful increase in the fourth quarter, following numerous quarters of sequential declines. As we have discussed in the past, manager tenure is a key in successfully deploying our in-store strategies.

Our online sales channel delivered mid-teens growth during the quarter, and saw increased use of our ship-to-store option that was implemented earlier in the year. Gross margin was 69.5% for the fourth quarter and represented an increase of 70 basis points versus last year.

Q4 adjusted EBITDA grew 9% and EBITDA margin was approximately flat versus the prior-year period, both of which were strong improvements from prior performance on these metrics during the first three quarters of 2014. The fourth quarter completed a year in which we generated free cash flow of approximately $6 million while adding 19 stores and relocating one.

Our inventory management continued to improve, as we reduced our year-ending inventory, including prepaid amounts, by nearly $4 million versus 2013, while growing full-year sales 12% and opening 19 locations. We continued to optimize our assortments and remain committed to assorting the best-of-the-best for each product category. In Q1 alone, we are bringing in over 200 new SKUs from across the world that will bring more color, the latest design trends, and large-format tiles into our assortment.

As we look towards 2015 and beyond, our key initiatives to deliver our results will include the following. The first initiative centers around retail talent identification and training. We are accelerating the utilization of our newly created market manager positions where we have implemented incremental compensation opportunities for achievement of turnover reductions, the development of assistant manager and store manager talent in that market, and total market financial performance.

We are further developing manager-in-training candidates that receive full classroom and on-the-job training, resulting in improved manager placements and transitions. And we continue to improve our hiring and selection process, which will further drive down turnover and result in the most qualified individuals leading and working in our stores.

Our next key initiative is expanding our focus on the professional customer. Since hiring a dedicated leader to grow our business with the professional customer segment, we have already seen some early success with marketing efforts that we feel are scalable and repeatable. We believe there is a long and sustainable opportunity to drive greater penetration as well as loyalty with professional customers.

In addition to a dedicated leader, we have allocated marketing funds to market The Tile Shop's differentiated design proposition to this segment in 2015. This marketing investment is almost entirely new to the historical dollars towards professionals, but doesn't significantly increase our marketing spends in total.

As we continue to invest in the identification, training and development of our associates, store managers, and market managers, as well as more fully tailor our marketing plans for retail and professional customers, we are also modifying our store opening plans for 2015. Our current plans include opening 8 to 10 new stores in 2015. We would likely expect this number of store openings to expand in the future as we build out our talent pipeline.

We remain very bullish on our ability to further identify our retail footprint in the coming years. We expect two to three of our store openings in 2015 to be in new markets, with the majority being in established markets, the latter of which have performed very well over the past year. During the year, we will continue to refine our store layout and merchandising plans to drive efficiencies in the amount of space that we will need in the future. And we fully expect that our average store will continue to [decrease] the amount of square footage necessary to execute our plans.

Additionally, since we last spoke, in the latter part of Q4, we began to test incremental advertising in new markets that we entered in 2013 and 2014, with the goal of building awareness and customer traffic to stores in those locations. These efforts are in the early stages, and we plan to leverage the results to inform future marketing investments to support new stores.

In addition to the items just mentioned, further development and enhancement of our multichannel capabilities and working capital management also serve as key focus items in 2015. The past three years for The Tile Shop represented a significant phase of investment. Our store count doubled; we entered over 20 new markets; we added distribution and manufacturing facilities; and made investments necessary to support rapid store growth.

These investments have positioned us to bring our best-in-class store experience and the most diverse product assortment in the industry to millions of new customers. As we celebrate our 30th anniversary this year, we believe the assets and specific plans are in place to begin delivering strong growth and earnings beginning in 2015, while still being in the early stages of our journey to become the leading national specialty tile retailer.

We are encouraged by the strength of in-store and online traffic, and comparable stores since the beginning of December. And we believe it is a reason for cautious optimism as we continue to work toward delivering our goals for 2015. The team and I will look forward to providing future updates to all of you in the coming quarters.

With that, let me now turn the call over to Kirk for further discussion on the quarter and our outlook for 2015.

Good morning. I will begin by taking you through greater detail on our fourth quarter and 2014 before discussing our outlook for 2015. Today, we reported net sales of $63.3 million for the fourth quarter of 2014, which represents an increase of $5.5 million or 9% over sales of $57.8 million in the same quarter of last year. Comparable store sales growth was flat for the quarter, relatively in line with the prior two quarters.

Our year concluded with sales of $257.2 million, growing 12% versus 2013, with comparable store sales growth that was approximately flat. Given comp sales growth was very consistent with Q2 and Q3, I will turn to the performance of our new stores opened since 2013 that we discussed in detail on our third-quarter call.

Although we are especially focused on improving sales at these locations as quickly as possible, the initiatives that will ultimately lead to the most impact, including talent development, market managers, and professional customer focus, will likely take some time. That said, there were good signs of progress at many of these locations since our Q3 call.

During the fourth quarter, sales per month per store for the 36 stores opened, from 2013 through Q3 2014, increased 7% from Q3 levels. When looking at the trend over the past two months of December and January, sales per month per store at these locations increased 17% from Q3 levels, with 2014 vintage stores increasing 23%. These are early steps in the right direction for these stores, and we look forward to providing further updates on their progress.

Our key 2015 initiatives are intended to provide very specific help to our newer store locations. Having experienced market managers to mentor new store managers, investing in a deeper bench of well-trained assistant managers, focusing on how to help our stores in growing their professional business accounts, and driving marketing effectiveness, are all efforts we expect to fuel the performance of our new stores in 2015 and beyond.

Gross profit increased $4.2 million in the fourth quarter or 10.5% over last year. Gross margin rate of 69.5% increased modestly from our Q3 rate, capping a year of consistent gross margin between 69% and 70%, finishing the full-year at 69.6%. Gross margin improved 70 basis points compared to the fourth quarter of 2013, which was impacted by heavier promotional discounts.

Our selling, general and administrative costs for the quarter were $40.2 million as compared to $36.8 million in the fourth quarter of last year. Fourth-quarter 2014 SG&A included approximately $0.3 million of nonrecurring costs, primarily related to shareholder litigation expense. We concluded the fourth quarter with 107 stores, a 22% increase versus the conclusion of last year's fourth quarter, when our store count was 88. Consequently, when looking at the $3.4 million year-over-year increase to SG&A, essentially all of it is attributable to new store growth.

Depreciation and amortization, rent, property taxes, utilities, and other occupancy costs, represented $3.5 million of SG&A growth versus the prior year during the quarter, while non-occupancy-related costs were down slightly as we focused on cost reduction opportunities during the quarter. Pre-opening expenses were approximately $176,000 in the quarter.

Adjusted EBITDA was $10.3 million in the fourth quarter, representing growth of 9% versus the prior-year period. Adjusted EBITDA margin was 16.2%, which was approximately flat year-over-year. The growth in adjusted EBITDA and flat EBITDA margin marked an improvement from previous quarters in 2014. The non-GAAP net income presentation in the press release adjusts our GAAP quarterly results by eliminating unusual or nonrecurring costs, and then applies the tax rate to the result. This presentation results in non-GAAP net income for the quarter of approximately $1.7 million, which translates into a basic and fully diluted earnings-per-share of $0.03.

For the full-year, basic and fully diluted earnings-per-share were $0.23. The fourth quarter had an abnormally high effective tax rate of 47%. The higher rate was attributable to the impact of recognizing a relatively fixed amount of expense for incentive stock options, which is not deductible for tax purposes, combined with generating lower net income and certain discrete items that were recorded during the quarter.

Turning to our balance sheet, as of December 31. We ended the quarter with $5.8 million of cash and $88.5 million of long-term debt. At quarter-end, we had slightly over $20 million of borrowings available under our long-term credit facilities. We are pleased with our $69.2 million year-end inventory during a year with sales growth of 12% and the opening of 19 additional locations.

Capital expenditures were approximately $5.6 million in the quarter, primarily related to new store investments. With respect to cash flow, the Company was pleased to generate positive free cash flow of approximately $6 million in 2014, despite the industry challenges and new store productivity softness experienced throughout the year.

Now let's shift gears to discuss our outlook for 2015 in greater detail. From a macro perspective, year-over-year growth in existing home sales did turn modestly positive for the fourth quarter. Various sources are predicting improvement in existing home sales for 2015. However, until we see that growth trend continue beyond one quarter, we plan to take a more cautious view.

For the full-year 2015, the Company expects that revenue will range between $275 million and $290 million. Comparable store sales growth is expected to be in the low-single digits. Comparable store sales growth for 2014 openings should strongly overindex versus historical year-two levels, but we are also limiting our expectations on significant acceleration of 2014 new store revenues until the second half of the year.

Also, it's important to note that while we expect healthy comparable store sales growth from the 2014 stores, the weighted contribution is limited, given a smaller base of sales dollars. We also expect solid growth from 2013 and 2012 openings, while expectations on mature stores will be more conservative until there is further traction beyond what we've seen since the beginning of December. We expect half-two comparable-store sales growth to be stronger than half-one after the various initiatives discussed today have had sufficient time to have a more material impact on results.

Gross margin is expected to be between 69% and 70%. Non-GAAP earnings-per-share will range between $0.27 and $0.33 per share, representing year-over-year growth between 17% and 43%. This assumes an effective tax rate of 41% and approximately 51 million fully diluted shares outstanding. For the first quarter only, earnings-per-share are expected to decline, based primarily on the continued impact of new store deleverage, as well as modest incremental marketing investments for advertising tests in new markets.

We expect adjusted EBITDA margins to improve 100 to 200 basis points from the 2014 rate of 18.5%. As Chris discussed, we expect to open 8 to 10 new stores in 2015. Two openings will occur in the first quarter and likely one in Q2. The balance will occur in the second half of the year. Only two to three of these stores are expected to be in new markets, two of which are Q1 openings in Tampa and Orlando.

Capital expenditures are expected to range between $17 million and $20 million. Our expectation for depreciation and amortization is approximately $23 million, and stock-based compensation is expected to be approximately $5 million.

With that, operator, we can now turn the call over for questions.

(Operator Instructions) Peter Keith, Piper Jaffray.

Thanks for taking the questions. I was curious on the commentary regarding your favorable and near-term sales trends, I think you've characterized since the beginning of December. Just thinking back, it was December last year when the weather started to negatively impact your business. So, could you just provide some color on -- do you think that the sales trends are accelerating from easier compares? Or are you starting to notice some kind of fundamental change across the base that's encouraging?

Peter, this is Chris. A couple of things that I'll say to that point. December for us last year was actually a very difficult comparison when we look at the quarter Q4 of 2013. So the comparison for December in particular was actually a very difficult comparison from that standpoint.

We do feel that there is, as we discussed in the script as well as what I said in the release, we feel that there is a good, strong, positive momentum in store traffic, online traffic, and in general, a robustness of customers that are looking to buy and are looking to embark upon a project within the first quarter of this year. So, we are seeing, again, positive momentum across all of the chain. And when I look at it year-over-year from that standpoint, Peter, we remain very encouraged.

Okay, that's great. And then just a clarification question for Kirk. I was intrigued with some of the numbers you had cited regarding the 2013 and 2014 stores. I think you said the 2013 class was up 23%. And I wasn't quite sure if that was sequentially or year-on-year?

Good morning, Peter. This is Kirk. Yes, that's a sequential improvement. And we are seeing -- we saw some good sequential strength between Q4 and Q3; and then on into, if you combine December and January results, even stronger sequential improvement during that time period versus Q3.

Okay. And I guess, directionally, are the stores that were opened in late 2013, there's a big slug of them that are now hitting the comp base. Are those -- it sounds like they are running good on a sequential basis. Are they running up year-on-year at this point?

They are. They -- we talked a little bit on the Q3 call that the 2013 stores the first half of the year were certainly a little stronger than the 2013 stores that we opened in the latter half of the year. But the stores as a group are now -- they are higher than the historical norm of doing a 20% comp in the second year. And so we are happy with that.

Now, we have to call out that, of course, they are starting from a lower sales base because they underperformed, particularly the ones that we opened in the latter half of 2013. But nonetheless, we are seeing good improvement there.

Okay, that's great. So lastly for me then, I'm encouraged with the slowdown in the store openings, and I like the fact that you are going to do more existing markets. I guess just to think about some store overlap, do you guys notice any cannibalization as you are opening up a second or third store in a market?

Peter, this is Chris. We really don't. We're -- I mean, even our most densified markets of DC, Baltimore, as well as Chicago -- in Chicago, we still only have 10 stores in that market. We've opened up two stores in that market over the last year, as you know, in downtown Chicago in the Lincoln Park neighborhood, as well as the far west suburbs out in Geneva. And both of those stores continue to perform excellent across the board.

We don't see cannibalization really anywhere in the chain, across what I would say -- in any material way. I would look at that we still have opportunities in both those markets that I just mentioned, as well as many other existing markets as well.

Okay. Thanks for all the helpful feedback and good luck this coming year.

Thanks, Peter.

Thanks, Peter.

Daniel Moore, CJS Securities.

Can you give us again just a little bit more color on the progress you've made in identifying and promoting the -- I think on the last call, you said roughly 18 new store managers? You provided some detail in your prepared remarks, but how many of those have been identified? And how long should we think about that, that process in general?

Hi, Dan, this is Chris. The process will continue on -- that we're looking at it as one of the key standard operating procedures that we have in the Company around talent identification, training, and then, ultimately, transitioning into stores. Six of the 18 that I spoke about have moved into store manager positions across the chain. I would expect many of those others will go into it as well.

We didn't specifically call out 18 because the number has grown significantly as we continue to train up-and-coming assistant managers, and then also, augment that with new hires that we are placing through the system as well. So, just as I've talked about in the past pertaining to that 90/10 ratio, I think that's still a very good approximate gauge of looking at internal promotion, and continue to grow their career from that standpoint, and then augmenting it with people that we are finding in the market that live in the market, that love that area of the country that where they are from, have great retail experience, maybe not necessarily the tile industry, but somewhere that will deliver a superlative customer experience.

That's the biggest thing for us, given the fact that we are very a high touch model. And so it continues to go well. Very pleased with the results of both identification process, the process that we are putting them through, what we call Tile Shop University. And that involves both online as well as in-person, and direct feedback and leadership from the managers. And then, obviously, our market manager position of having that senior store leader guide them and help them as they go into their store, has been a huge help as well.

And shifting gears a bit with a few more months under your belt, are you as confident today as you were perhaps three or four months ago, that the challenges you've had from a comp store perspective are kind of strictly managerial versus competitive, or any other external factors other than just the macro environment?

I would say the biggest one is around macro. I think that is something that we are obviously very conscientious here at The Tile Shop, and looking at things that are obviously impacting other retailers across the board.

We feel that what we are doing from an internal process standpoint, and looking at training and development as key components of delivering our value proposition, and having that senior -- excuse me, that seasoned store manager in place for a sustained period of time, especially as we focus more and more on the pro-business and accelerating that growth at some of our newer stores, we do feel that what we are doing is working. And we also feel that, from our standpoint, that we think that the results are really beginning to manifest themselves into the numbers as well.

And lastly, and I'll jump back in queue -- as we look beyond 2015, obviously, you mentioned you would look to re-accelerate new store openings. Has the philosophy changed at all in terms of balancing growth with allowing margins and profitability to increase at a faster rate, as you sort of look back over the experience of the last year or two?

Well, certainly, we want to be looked upon by our investors that we deliver superlative returns on EBITDA percentage and EBITDA dollars. We certainly want to have a strong growth from our comp stores and looking at that as a key component. So, I think that the days of a 30% increase in store openings that we did in 2013 are behind us. I mean, certainly, when you look at that type of store growth in a very concentrated period of time, it's difficult for any company. And I think we saw some of the residual effects of that as well.

But I think our store growth is manageable. I think we are excited about what we're doing and having a strong pipeline of talent go into the stores to lead them and to -- and build those relationships that are so important for our business within the community that they serve. And competing against the -- back to your point on competition, Dan -- competing with the local stores that have been in a market 20, 30, 40, 50 years, as well as regional competitors and, obviously, big-box competitors having that familiar face, and that person that knows the tile industry, has lived it, has known it, is very important for our success as an organization. And I think we are very excited about what we're doing on that front.

Okay. Thanks for the color.

Thank you, Dan.

Peter Benedict, Robert W. Baird.

It's actually Justin Kleber on for Pete. Thanks for taking the questions. I wanted to focus on the comments on the increase in marketing funds allocated to Pro. You guys mentioned the dollar increase in total marketing spend us not going to change that meaningfully. So I'm curious where these ones are being reallocated from? And have you contemplated any impact to the DIY customer if you are indeed reducing add-spend to this group?

Good morning, Justin. This is Kirk. Yes, traditionally, the Company has spent less than 3% of sales on advertising, and we don't see that changing any time soon. We talked about a little bit of an increase in Q1 with some advertising tests. But largely, the advertising spend that we are doing, both for the Pro customer as well as the consumer traditional DIY, it really goes hand-in-hand. And it fits together pretty neatly.

There is a -- the opportunities to heavily focus or more heavily focus on the Pro is really just a shift in dollars. But it really doesn't change the base spend that we rely upon for both customers.

Okay. And then, Kirk, can you remind us what percentage of sales are with that Pro customer today? And I guess where does that mix sit in maybe the highest penetrated locations?

Sure, yes. It's traditionally -- it's a little hard to get at some of the data, but it's roughly one-third of our total revenue, is the Pro customer, so we think there is a significant opportunity for growth there. Some of our more mature locations that have had years of time to develop that relationship with tile contractors, designers, and small homebuilders, it's close to 50% in some of those stores.

Okay, great. And then last question, I think on the third-quarter call, you spoke to comps in your more mature markets being up about 4% across your four largest regions. Just curious in terms of can you speak to the regional differences in comps in the fourth quarter? Did you still see that same dispersion between some of your more mature larger regions as opposed to the overall chain?

We did. The four -- our four largest most mature markets in total were up year-over-year in the fourth quarter.

All right. Thanks, guys. Best of luck.

All right. Thank you.

Joe Feldman, Telsey Advisory Group.

I wanted to ask about expense leverage for 2015 to get to the EPS that you're talking about. Is that mostly coming from just lower pre-opening because of the lower store count? Or are there other expense controls being put into place that are helping to drive that?

Good morning, Joe. This is Kirk. The -- as we talked about, we are anticipating being able to drive about 100 to 200 basis points of improvement in EBITDA margin. And, really, what that is, is it's growing revenue in both the newer stores and, hopefully, the mature stores as well, and getting leverage.

We don't anticipate any significant cost reductions, although there are opportunities across our business. Some of the examples are inventory control, operating supplies and other things that don't directly impact the customer. So we'll be focused on cost discipline, but the leverage that we are getting, we are anticipating next year, is really more about getting sales leverage and driving revenue productivity.

Okay, got you. So it's not because you are going to open 8 to 10 stores versus, I think, we were once all thinking around 14 or so? Okay. And then, I think you mentioned in the prepared commentary that that 8 to 10 may not be the new run rate to think of. And I guess I was curious just to try and understand that a little better. And maybe why not? Why not just have 8% to 10% square footage growth as more of a steady-state to go forward?

Sure, absolutely. I mean, I think as Chris mentioned, over the last couple of years, the percentage increase, in terms of the base stores that we started each of the years with, was pretty significant. In fact, 30% at -- two years ago and a little over 20% this last year.

So on a percentage basis, I don't think it will ever be greater than that. But 8% to 10% this year, I think we feel like that gives us a little room to breathe and it lets some of the initiatives that we talked about come to fruition. We can make sure that we are on the right track. And then, as we head into 2016 and beyond, while we won't certainly likely ever open 30% of our store base again going forward, we could potentially go a little higher than the [8% to 10%] that we're planning in the next 12 months.

Got you. And then, the one last question I had was you mentioned also maybe down the road finding ways to shrink the size of the box a little bit, if I heard it correctly. And I was wondering if you could talk about that a little more? Like, have you started to test that at all? And what are you envisioning? Like, is it 5,000 square feet less or 10,000? What is the thinking behind that?

Hi, Joe, it's Chris. There is a multitude of different things that we are looking at from a store square footage standpoint right now. So I believe, in the release, our average square footage of the store is 22,200 square feet right now. And we are looking at the average from our standpoint going forward, certainly below [20,000]. I think that's one of the things that we wanted to communicate very directly that that will continue to go down.

The stores that we are opening in this year, the ones that we've identified with our real estate portfolio and team, is -- are all below [20,000] on the ones that we'll open from this point going forward for this year. I think there is an opportunity -- certainly we have had success in operating smaller footprint stores across the country, and operating stores as small as 11,000 square feet and 13,000 square feet as well. So I think there is a good sweet spot for us as we go into 2015 and beyond of continuing to bring the average down from a square footage standpoint, and all the benefits that come from that as well from less lease payments, utilities, and other landlord issues as well.

Got it. Thanks for that explanation. And good luck with this quarter, guys. Thank you.

Thanks, much.

Thank you.

Dillard Watt, Stifel.

Wondered if you could comment on any trends year-to-date, I guess, in January and February on what comps sales are looking like? Is that maybe trending above low-single digits now and some conservatism for the rest of the year? Or what are you seeing so far?

Good morning, this is Kirk. Hey, I don't want to get into specific metrics, but we are seeing strengthening in our business and an increase in traffic, as Chris talked about in his opening remarks. And right now, we are cautiously optimistic that, hopefully, that trend will continue. So at this point, that's probably all I'll say, but of course, we'll give an update in a couple of months in our Q1 call.

Okay, thanks. And any comment on the free cash flow expectation for 2015?

Sure, yes. I think we are -- obviously, with opening fewer stores than we have the last couple of years, we have an opportunity to generate some pretty strong free cash flow next year, and that's our goal.

Any number, maybe?

I think that looking at $20 million to $30 million range is doable.

Great. Thank you so much. Good luck.

All right. Thank you, guys.

Seth Sigman, Credit Suisse.

I wanted to follow up on the traffic improving, and that's obviously encouraging. What are you seeing from a conversion perspective? So, are you seeing any sequential improvement in that customer coming in? You've clearly made some operating improvements within the store, changed some of the programs. What's the trend with conversion like?

Hi, Seth, this is Chris. We are seeing conversions remaining steady at prior periods and certainly within our expectations from that standpoint. I would say -- one of the things I would say is on the Web, I would view our conversion as increasing, as we feel that we've optimized our ability to drive traffic to our site for people that are in the market.

So, qualified leads coming into the market come through our site, of both looking at and going to their nearest tile shop. But where that may not be feasible, or if they want to have a different purchasing experience of purchasing online, we have seen conversion in that channel increase throughout the latter part of 2014 and certainly going into 2015.

Okay. Okay, thanks. And then just in general, and the focus on the Pro, can you talk about some of the margin implications associated with doing a better job of serving the Pro and how that's embedded in the margin outlook that you guys provided?

Sure. This is Kirk. We feel like our range that we provided for next year -- 69% to 70% -- fully contemplates any significant mix into the Pro business. And we are certainly hoping that happens. But we are not -- again, I think we're pretty comfortable with that range, even with adding a fairly significant amount of Pro customers to our business next year.

Okay, and one last one. I know there was a lot of talk about real estate on the call, but just in general, Kirk, I know you've had your hand a lot more in the real estate than maybe in the past. What is the change in the approach, whether it's store locations -- I mean, clearly you talked about the size of the stores as well -- but what else are you learning about? How else are you thinking about real estate going forward?

Well, sure. I'll make a comment and then I'll see if Chris wants to add anything. But I've seen now roughly about one-third of our stores, and including many of the newer stores that we talked about on the Q3 call. And I think the things that we've talked about in terms of the opportunity to develop talent and strengthen the bench, and train people to serve customers in all of our various locations across the country, is certainly, in my view, the biggest opportunity we have.

The opportunity to grow the Pro customer is certainly a very significant opportunity as well. And then, focusing on marketing effectiveness to drive awareness, particularly in new markets where we open stores, is another big opportunity for us.

You know, there is always opportunities to improve process. And I think we've recognized there's a number of opportunities to have a little bit more process discipline. And the new store opening and approval process is certainly one that always -- you know, you always look at as a retailer. But I think, in my view, as I tour around and see some of these locations, I think we've had a pretty sound process overall.

Having said that, we certainly are looking for various ways where we can make it even better. Now maybe -- if Chris has anything to add, I think he can chime in.

No. I think -- Seth, this is Chris. I think Kirk said it well. I think looking at real estate, our real estate portfolio, we are certainly always looking to improve upon it. I think the -- I think maybe just the change from maybe the past is what we talked about this year. We talked about the 19 stores that we opened this year and the one relocation.

I'll say the one relocation that we did has been an absolute home run for us. And then I think that's a little bit of a change for the Company of looking at it with a very surgical approach and analytical approach about what are the things that we want to do? How do we keep that customer base if we were to relocate that store? How far do they have to go? Looking at the traffic patterns. And I think those are an example of just some of the things that we are looking at from a real estate standpoint of being more surgical in the approach, and understanding the analytics behind our decisions.

And I think, again, the relocation that we did in this year, I think showcases to everyone at the Company that we can improve upon locations where the lease is ending, where there's an opportunity to exit and improve where our customers are really shopping at, and take advantage of a traffic that we don't have to generate all by ourselves, to take advantage of shopping districts that still are not Grade A rent -- we are never going to be in Grade A rent locations -- to take advantage of traffic flows that will serve us well and having convenience from that standpoint.

I think the other thing I'd add is, it's important to note that some of our newer store openings in Q4 have performed pretty well out of the gate. And a couple of those are smaller formats. They also had the benefit of some of the learnings that we had in the late summer and that we talked about on the Q3 call, where we opened the stores with a little bit heavier focus on the Pro customer, on training and identification of the store manager and their staff. So, we're -- again, we are cautiously optimistic about those results as well.

Okay, thanks, guys. Nice to see the progress. And good luck on the year ahead.

All right. Thank you.

Okay. And with that, there are no further questions in the queue. I'd like to turn the call over to Adam Hauser for any closing remarks.

Thank you for joining us on the call today. And we hope everyone has a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a good day, everyone.