Tile Shop Holdings Inc (TTSH) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tile Shop's second-quarter 2015 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to your host for today, Mr. Adam Hauser, Director of Investor Relations. Sir, you may begin.

Thank you, operator. Good morning to everyone, and welcome to the Tile Shop's second-quarter earnings call. Following our prepared remarks, the call will be open for analyst 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 measurements. 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, and thank you for joining us today. I'm here with Kirk Geadelmann, our CFO, and we appreciate you joining us this morning as we report our results from the second quarter.

We are very pleased with our results from the second quarter as they signaled additional progress on our key initiatives. We have continued to work on and refine a variety of initiatives with the intention of delivering improved financial results while serving all of our customers at a very high level.

Taking a long view, our roots are still in their early stages, but we are very pleased with the progress made through the first half of the year, and how that progress has led to strong results in each of our first two quarters of 2015. We will seek to take another step forward as we enter in the third quarter, with the goal of delivering strong results in the second half of 2015 and beyond.

Sales for the quarter were $75.7 million, exceeding our largest quarterly revenue previously achieved during Q1 by $2.7 million. $75.7 million of revenue represented the growth of 13.6% versus last year, including comparable store sales growth of 5.7%. (technical difficulty) sales growth occurred throughout the entire quarter, and our efforts to improve sales at our stores that were opened in 2013 and 2014 led to strong results for these stores, which Kirk will explain in greater detail shortly.

Our adjusted earnings-per-share in the quarter was $0.09. Adjusted EBITDA grew [60%] and adjusted EBITDA margin was 20.5% during the quarter, an improvement from the prior year and the previous quarter of 40 basis points.

Now, let me walk you through the highlights of Q2 in relation to our key initiatives for 2015. I'll begin by discussing our retail talent identification and training initiatives.

We added three additional market managers during the second quarter, and we now have approximately two-thirds of the store base being led by market managers. Stores under their leadership again exceeded sales expectations during the quarter and also played a role in continued turnover reductions. As previously discussed, we are planning to have the entire chain covered by market managers by the end of 2015.

We had meaningful declines in sales associates and assistant manager turnover from prior-year levels and store management turnover continues to be low. Additionally, sales and associate turnover dropped during the second quarter as compared to Q1. Average store manager tenure had another meaningful increase in the second quarter, with average tenure reaching levels not experienced since 2012. As we have discussed in the past, manager tenure is an important driver in successfully deploying our in-store strategies.

Finally, our advance with manager candidates continues to strengthen as a result of our ongoing training and development efforts.

Our next key initiative is expanding our focus on the professional customer. During the quarter, we continued to execute numerous efforts to build our pro business, including direct marketing, additional new product offerings, and in-store events. In the second quarter, our Pro styles growth again outpaced the Dallas hood business by a meaningful factor, while essentially leading to an increase in our total Pro sales mix of about 200 basis points from Q2 of last year.

The mix increase was driven by younger markets where our emphasis on building the Pro business has been most focused. The opportunity for greater penetration with this customer segment is still very significant, especially in our less mature markets.

In addition to our efforts to build our business with the professional customer, general improvements in our marketing effectiveness were also a key component in achieving our 2015 goals. We continue to specifically allocate advertising dollars in the second quarter towards a subset of our 2013 and 2014 new store markets in an effort to build awareness and traffic.

The sales results in these markets continued to improve by a factor that indicates a strong return on this localized advertising spend. And our plan is to continue these marketing efforts in new store markets for the balance of the year.

Enhancements made to our search engine optimization and other vehicles to drive traffic to our website continued to pay off with another strong quarter of sales growth online and a significantly enhanced online experience. In addition, there were several other accomplishments from our second quarter that I'd like to take a moment to highlight.

Free cash flow was $8 million, bringing our year-to-date free cash flow to over $30 million. We paid down approximately $5 million of debt during the quarter, bringing our long-term debt reduction during the first half of 2015 to $23 million.

Our quarter-ending inventory increased only 1% versus the second quarter of 2014, despite its 12% store unit growth and nearly 14% sales growth. As indicated in our press release this morning, we tightened or improved our guidance range for sales, comparable store sales growth, adjusted EBITDA, and adjusted earnings-per-share.

Finally, the second quarter represented a meaningful milestone for us, because we increased our adjusted EBITDA margin percentage from the prior year. We expect Q2 and 2015 to be an important inflection point for our Company of many years of adjusted EBITDA margin expansion.

The one metric we expected better performance on during the quarter was our gross margin rate. Kirk will explain the decline in greater detail in a moment, but it's important to note that we don't feel that the lower rate had a meaningful impact on our total sales during the quarter.

During the second quarter, we opened one new store in the Charlotte, North Carolina market, and now expect to open a total of seven to eight stores this year. A slight reduction from our prior expectation of eight to 10 as a result of certain previously identified markets with new stores in 2015 not having sites that met all of our selection criteria. At the remaining store openings for the year, we expect that all will occur in existing markets. Looking beyond 2015, we feel that 8% to 12% annual store unit growth is a solid expectation for the foreseeable future, with openings focused largely in existing markets, with a major new market expansion expected in early 2016.

From a product category perspective, marble, subway tile, and faux wood were again the key drivers of growth in the quarter. The first half of 2015, we have brought in over 300 new SKUs from across the world that bring more color, the latest design trends, and large-format tiles into the assortment. In our second half, the key addition to this assortment will be several new SKUs that will compete at opening price points across the chain, as we seek to have all price points covered in all product categories.

We are very energized by the results of our first half against the goals we set forth at the outset of the year. We are focused on making additional progress in the quarters ahead on our journey to becoming the nation's leading specialty tile retailer.

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

Thanks, Chris. Today, we reported net sales of $75.7 million for the second quarter of 2015, which represents an increase of $9 million or 13.6% over sales of $66.7 million in the same quarter of last year. Comparable store sales growth was 5.7% in the quarter. Sales productivity increased again during the quarter at our stores open during 2013 and 2014.

Our 2013 vintage stores, open an average two years at quarter-end, had high-teens comparable store sales growth. These stores had a sequential increase in sales from Q1 to Q2 of approximately 6% compared to our more mature stores opened in 2012 or earlier, that were approximately flat from Q1 to Q2, which is typical for mature stores.

Our 2014 vintage stores had a sequential increase in sales of 14% in Q2 versus Q1, and high double-digit comparable store sales growth, indicating very solid progress up the maturity curve. Many of the underperforming 2014 stores remain below the desired revenue levels for their current age, but they again made significant progress during the quarter. Our more mature stores opened in 2012 or earlier had low-single-digit comparable store sales growth during the quarter.

Gross profit increased $4.8 million in the second quarter or 10.3% over last year. Gross margin of 67.8% represented a decline of approximately 200 basis points versus both last year and Q1.

There were three primary drivers of the decline in gross margin that occurred in the quarter. First, we tested many regular price changes during the quarter in competitive and young markets in order to improve close rate. Unfortunately, minimal changes to discounting habits occurred in most stores, leading to unexpected margin erosion. As a result, the number of stores and SKUs with these price changes has been reduced to locations where both the sales and bottom-line return was positive.

Additionally, stores that remain with these price changes have received additional training on how to best leverage this part of their assortment without significantly reducing their gross margins. These actions should significantly reduce the gross margin pressure related to this factor as we move forward.

Second, we had a higher mix of customer delivery sales in the quarter, and we generally run this portion of our business at flat to negative margin. Much of this increase is attributable to customers wanting orders as quickly as possible at newer stores that have a lower frequency of standard deliveries from our distribution centers to their store.

Finally, we had some national margin erosion due to significant inventory transition activity during the quarter. This pressure should ease, given much less inventory entering the assortment in the back half.

Our selling, general and administrative costs for the quarter were $42.9 million as compared to $39.4 million in the second quarter of last year. Second quarter of 2015 SG&A included approximately $0.3 million of nonrecurring costs related to litigation expenses.

We concluded the second quarter with 110 stores, a 12% increase versus the conclusion of last year's second quarter when our store count was 98. Therefore, when looking at the $3.5 million year-over-year increase to SG&A, most of it is attributable to new store growth.

Depreciation and amortization, rent, property taxes, utilities, and other occupancy costs, represented $1.9 million of SG&A growth versus the prior year during the quarter. The remainder of SG&A growth during the quarter was mostly attributable to variable compensation growth from sales and store growth, and to a lesser extent, advertising, which increased very modestly as a percentage of sales.

Preopening expenses were approximately $94,000 in the quarter. Adjusted EBITDA was $15.5 million in the second quarter, representing growth of 16% versus the prior-year period. Adjusted EBITDA margin was 20.5%, increasing versus both last year and our first quarter by 40 basis points. We expect to increase our full-year adjusted EBITDA margin by 100 to 200 basis points in 2015.

The non-GAAP net income presentation in the earnings 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 $4.8 million, growth of 20% versus the prior-year period. The current-year non-GAAP net income translates into a basic and fully diluted Q2 earnings-per-share of $0.09.

Turning to our balance sheet, as of June 30, we ended the quarter with $12.8 million of cash and $63.8 million of long-term debt. Our free cash flow of over $8 million during the quarter allowed us to pay down $4.8 million of debt in Q2. We are pleased with our $64.6 million quarter-ending inventory, which represented a 1% increase from last year during a quarter with nearly 14% sales growth and 12% growth in store count.

Capital expenditures were approximately $2.9 million in the quarter, primarily related to new store investments, store remodel activity, and distribution center projects. Half One capital expenditures were approximately $7 million. As detailed in our earnings release this morning, we are providing updated expectations for the full-year based on where we are through the first half of 2015, and our current outlook for the remainder of the year.

I'll highlight the handful of items that changed from our original expectations set forth in February and reaffirmed in April. First, from a topline perspective, our full-year sales expectation has changed from $275 million to $290 million to $280 million to $290 million. Additionally, we now expect comparable store sales growth of mid-single digits, a change from our previous guidance of low-single-digits.

Next, we expect full-year gross margin of approximately 69%, a change from our previous range of 69% to 70%. From a bottom line perspective, the starting point of our expected range for both full-year adjusted earnings-per-share and adjusted EBITDA were increased. We now expect adjusted earnings-per-share of $0.28 to $0.33 versus previous guidance of $0.27 to $0.33. And we now expect adjusted EBITDA of $55 million to $60 million versus previous guidance of $54 million to $60 million.

Finally, as Chris explained earlier, our new store opening expectation is now seven to eight stores rather than eight to 10. Capital spending expectations remain at $17 million to $20 million, as we are shifting additional dollars towards store remodel activity and merchandising projects, offset by fewer store openings.

From a modeling perspective, we expect strong year-over-year growth in sales, operating income, adjusted EBITDA, and adjusted earnings-per-share for the entire second half, but growth rates are expected to be stronger in Q4 than Q3. As expected, our SG&A growth moderated in the second quarter to high-single-digits, and SG&A growth is expected to remain in the mid to high-single-digits during the second half of the year.

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

(Operator Instructions) Daniel Moore, CJS Securities.

Obviously, you touched on the balance sheet. Really significant deleveraging over the last couple of quarters; lowered debt by about $25 million year-to-date. I think you are now down below one times 2015 expected EBITDA. What are your expectations for additional deleveraging in the back half of the year, given the CapEx expectations? Do you expect inventories to start to work back a little bit higher as new stores open? And a quick related follow-up.

Yes, hi, Dan. This is Kirk. We do expect inventories to tick up just a little bit. Just -- it's mostly seasonal. But I think we still feel good about being able to generate some additional free cash flow in the back half, and pay down some additional debt. So we're -- we think we've made some very good progress over the last six months or so. And hopefully, that will continue over the next six months. But probably it will moderate just a little bit in the back half, of course.

Okay. That's helpful. And then as we think about new store growth going forward, maybe 2016 or even beyond, what are -- are you looking toward the balance sheet in terms of leverage? Are you looking toward specific EBITDA margin targets that you'd like to get back up to before perhaps accelerating growth? Just maybe talk about how you are balancing those thoughts as we move maybe even beyond fiscal 2016.

Sure, yes. This is Kirk again. We feel -- unit growth in the range of 8% to 12% is about right. We are very committed to that figure. I think we are gaining confidence. We noted again that our goal is to get 100 to 200 bps of leverage in adjusted EBITDA and NOI this year versus the prior year. And I think we are feeling better and better about that trend continuing on for the next several years. We'd like to get back into the mid-20s adjusted EBITDA range over the next several years.

Hey, Dan, this is Chris. Just one item to add. Just want to reiterate to all of our listeners, is that on the 8% to 12% guidance that we are having for store unit growth for next year and beyond, we feel that's a very manageable number for the Company. We feel that from a opportunity within the regions that we serve right now, that we are well-positioned.

And then as we go into 2016, as we mentioned in the release, we'll primarily be focusing in on our existing markets where we've had a tremendous amount of success. And stores, historically, within those markets come out of the gate much quicker than a new market.

As we mentioned in the script that we will be going into a new market within 2016, which we are very excited about and feel that will have a tremendous amount of success, and also leveraging assets that we currently, from a distribution center standpoint right now, that we'll be able to continue to utilize and be more efficient with the assets that we've deployed right now.

And then just lastly, you mentioned the slight reduction in guidance for this year in terms of new stores having difficulty finding a location that was suitable. Is that anything that is concerning to you? Or is it a particular market that you still feel very good about, just couldn't quite find that ideal location short-term --?

Yes, I wouldn't classify it as difficulty. I would look at it more from the selection criteria that we have in place is more robust. We have a broader team looking at sites across the Company.

And from our vantage point, really that we are -- the 7 to 8 number from our standpoint, we felt it was a good number. We feel confident about it. We also feel good about the selection of those sites. So I wouldn't look at it as difficulty of finding sites. There's plenty of sites to choose from, certainly with any retailers closing stores and not opening them.

But I think we are also looking at what do we have from a utilization of our capital, and what will have the largest return on the capital for stores that we feel we can go into and go out really very aggressively within those markets, and not seeking a marginal site in order to get to a number that we've arbitrarily set.

Very good. And congrats on the progress we've made to date.

All right. Thanks, Dan.

Thank you, Dan.

Peter Keith, Piper Jaffray.

I want to just dig in a little bit on the gross margin dynamic around pricing. I wasn't quite clear coming out of the prepared remarks. So, maybe you could provide a little more detail. It sounded like you tested some price discounting. It worked in some stores and then it didn't work in others. And net-net, you are going to keep it in a -- keep it going in a handful of stores. Is that the right interpretation?

That would be correct, Peter. So it's a -- we've done a multi-month test on different price points. And really what we are looking at is testing out price elasticity among SKUs within families of products as well as families across the board. We've started that test in March. It continues going through June.

Where much of the erosion happened was in the middle part of the quarter. And as Kirk mentioned in our prepared remarks, the training that we passed to our sales team was not as clear as it could have been or should have been. And we certainly had an opportunity there about looking at the level of discounting that would happen at a reduced price point within the store.

So that's not -- that's an opportunity for sure that we have from that standpoint. But I want to be clear that the stores that remain in this pricing test continue to have -- it's accretive across the board from their store standpoint, as well as what we are looking at from the Company's standpoint as well. Where we ran into some difficulty, as Kirk mentioned, was when we ran into a broader -- a larger degree of SKUs, as well as a higher number of stores. And the level of discounting was higher, or quite frankly, unchanged when we had the price point that we actually reduced in order to kind of generate traffic and also increase the close rate.

Okay. That's a good summary. I appreciate it, Chris. So just to follow on that real quick. Since you've now narrowed it down to a much smaller set of stores, you've seen the gross margin stabilize back in that 69% to 70% range?

Yes, we feel comfortable. So, the guidance -- so we are at 68.8% for the first half of the year. We narrowed the guidance from 69% to 70% to approximately 69%. We feel very comfortable, Peter, to achieve that guidance range for the duration of the year.

Okay, great. And then I wanted just to shift gears then on the 2013 and 2014 stores. So, the class of 2013, I think you said it comped high-teens. Was that a slight acceleration from Q1? And then when you say 2014 comped high-double-digit, is that the same as high-teens? Or what kind of general range should we think about for that class?

Good morning, Peter, it's Kirk. Yes, you are correct. It's -- we had a slight uptick in the comp for the 2013 vintage stores compared to Q1. So again, we are very pleased with both of those stores and also the 2014 vintage stores. They continue to exceed our expectations for this year.

In terms of the 2014 stores comp, there's about -- nine of the stores were comped during all or part of the quarter. So, still a little bit under half of that portfolio of stores from 2014 are comp, but it's a high-double-digit comp. Well west -- significantly higher than teens at this point.

Obviously it's early yet. As we get closer to having all those stores and the comp base at the end of this year, we'll have a better read on how much they've caught up to where we'd like them to be based on historical expectations. But again, very good progress with both groups of stores. We're pretty pleased there.

Okay. That's great. Thanks for the summary and good luck in the coming quarter.

Thanks, Peter.

Thank you, Peter.

Seth Sigman, Credit Suisse.

Nice progress in the quarter, guys. I wanted to follow-up on the pricing test you talked about. I'm wondering if you could elaborate on the rationale for the pricing test in the quarter? I think it's a productive exercise, but just wondering if it's a response to anything competitive, as it does seem to be a little bit of a shift in the philosophy historically. And perhaps --

Good morning, Seth. This is Chris. So, from a competitive standpoint, as I've noted on previous calls, I mean, the competitive environment for our business I would view as very dynamic, ranging from sort of the big-box home improvement centers to local tile distributors that have been in business in a local market for decades.

Really, we wanted to do a couple of different things, Seth, from our standpoint. One is, we really wanted to look at to see if -- what level of price elasticity really exists within some of these families of products that we've been selling for years, and do we have an opportunity to increase as well as decrease prices and see what actually happens with demand coming from our customer base.

So, I wanted to let you know that we see on both sides that we are actually looking at from our pricing standpoint. I wouldn't necessarily look at it from a change on philosophy. I think it's necessary for us to, as a management team, to really look at what levers are at our disposal, what are the things that are really going to drive a higher close rate, but also generating gross margin levels that we all expect to achieve. And we're certainly disappointed that we didn't achieve it within the quarter.

So that's certainly one. And then I think we also wanted to look at what are the ramp cases or impacts online as well. It's a channel that we don't talk about as much from a competitive standpoint. It's certainly very dynamic. We are very pleased with our performance in an online channel -- an omnichannel retailer, and feel that we are getting closer to that definition of an omnichannel retailer every -- closer every day.

And so, that was a necessary thing, element, for us as well. We've -- we're working on having that dynamic pricing capability within our online channel. And we felt that it was appropriate to begin that testing in our store channel really beginning back in March and really continuing up to today.

Okay. That's very helpful. And just any additional color on how much of the assortment was impacted by the pricing test and what percent of the store base?

It was a relatively small number of SKUs. I would certainly say less than 15%. At its height from a store count standpoint, it was about half of the chain. And as we exit into Q3, it's certainly around -- it's around 20% of the chain that has a pricing test ongoing at the moment.

Okay, got you. And then just one final one. On the Pro, yes, it seems like the focus there is progressing. Can you discuss what's working as you try to target the Pro? And give us a sense of how big that business is today. What percent of your business is driven by the Pro and any additional commentary on the economics of those transactions? Thanks.

Yes, so this is Chris still. So, the Pro business continues to be approximately one-third of total revenue for the Company. As we mentioned in our prepared remarks that it accelerated during the quarter on a year-over-year basis.

The things that are really working from our standpoint, Seth, is really having that localized presence. You know, the -- having the store manager involved, working with our local trade associations, having our Pro network leader be a big part of that outreach. And then also looking at -- we've also had a fair amount of success with localized advertising elements of attending trade shows, being involved with the community, and also direct mail has been quite effective as well.

Okay. Thanks very much.

Thanks, Seth.

John Baugh, Stifel.

Thank you for taking my questions. And great progress on the balance sheet in particular. I was wondering on two fronts. One, could you update us on what the capital per new store is running at? Is it down? What are sort of the opportunities there, both between inventory and store layout, to get that number down?

And then, secondly, I believe you made a comment that you didn't think the pricing initiatives improved or helped sales at all or much. I forget the comment. And I was just wondering, how you are confident in that statement or some color around that. Thank you.

I think, John, I'll start with the pricing element. I'll take that. So, from our vantage point, as I just mentioned in the previous question, the number of SKUs involved was fairly small. And we also look at the total amount of revenue that was happening during the pricing test as well, was relatively what I'll call compartmentalized for sure.

So, I think from our vantage point, we view it as less than a point of comp of the total comp that we delivered within the quarter. That's the way that we look at it internally, and I want to share that with you as well.

Good morning, John, this is Kirk. I'll answer your capital question. I think we are feeling more and more confident about our ability to reduce the historical average $1.4 million in capital for every new store to something lower than that. We have some of the smaller stores that we've built out here over the last 12 months or so are performing quite nicely.

We also have been pretty actively engaged in identifying different ways that we think we can reduce both the capital investment and the store size on a go-forward basis. The -- there's different ways to reduce CapEx. One of it is store size, but there are some other things that we are working on as well.

So, I think the question is just in terms of real estate availability. If we can find boxes that are smaller and we'll certainly look to work with those smaller box sizes. But even if we are in slightly larger boxes, I think you'll see us, over the next year or two, probably be able to reduce that initial CapEx investment pretty -- you know, by a decent amount. More to follow on that. We'll try to quantify that as we get deeper in to the next group of stores that we open.

Great. Thanks for that color and good luck.

Thanks, John.

Peter Benedict, Robert Baird.

A couple of questions. First, the delivery sales. I don't recall hearing you guys speak to that before. What percentage of sales are delivery historically? Do you -- and then why do you think it upticked in this quarter? I think you said it was new markets. Was that it -- it's also something that's used by the Pro's more? Just trying to understand that better.

Yes. Good morning, Peter. This is Kirk. I don't think we've really talked about the percentage of sales that are delivery, but it's historically been fairly substantial. We do typically collect a significant chunk of revenue on those sales.

But really what's happening here is our new stores, and the growth that we've experienced, particularly from the stores we opened in 2013 and 2014, they are sort of at an inflection point. And they are right between that place where we can justify sending another truck per week or increasing the frequency of shipping between the DC and the store. But they are not quite there yet.

And so they have customers they are trying to serve. The customers are willing to pay for the delivery. And so they are going ahead and they are doing that transaction. And so, really, we are mixing into more delivery sales because we are mixing into more revenue from new stores. As those stores grow further, I think that you'll see that moderate, and we'll be able to justify some additional shipping frequency between the DC and the store. And you'll see the margin erosion related to that piece of it go down.

Okay. That's helpful. And then kind of related to that a little bit, Kirk, the -- is this related all to online as well? I mean, I know online is not a big percentage of sales for you guys. I know the home center guys kind of speak to this as being a pretty good category actually online. So maybe talk about that, how you guys are progressing online.

I think Chris touched a little bit on the promotional stuff. Is there a difference between what you guys are promoting in-store versus online?

Hi, Peter. This is Chris. There isn't -- I'm not seeing anything really significantly different online versus in-store. Certainly any promotion that we run in an online channel would be honored in a store anywhere in the country. But as I mentioned, we are very pleased with the performance that we've had in the online channel. And as you mentioned, it's not a significant driver for the Company as a whole yet, but certainly like the progress that we've done.

I do believe in the online channel as a growth field for the organization. And certainly having a robust dynamic site that has -- provides the type of inspiration that we want to have that we think that we are very good about showcasing in the store, and showcasing that type of experience in an online avenue.

And we feel that we are getting closer each day about the investments that we've made in an online channel. It's certainly leading to revenue increases on a year-over-year basis that are pretty substantial. So, I wouldn't look at the freight category as a meaningful driver to what Kirk called about earlier, which is primarily focused around the mixing into higher degrees of new stores.

Okay, that's helpful. And then the last question, just on the mature stores, the comp, the low-single-digits. You may have mentioned this and I apologize if I missed it, but how are they comping kind of in the first quarter? Was there any sequential change there? And any plans for advertising changes in those markets over the second half of the year? Thank you.

Yes, Peter, this is Kirk again. Yes, the comp for the mature stores is similar in Q2 versus Q1. I think year-to-date, we are pretty happy with mature stores overall. There are some places we certainly think we can probably do better. But overall, I think it's pretty solid performance.

Okay, great. Thanks, guys.

Thanks, Peter.

Joe Feldman, Telsey Advisory.

Good quarter on the comps and overall. I wanted to ask about -- if you go back to the gross margin impact, can you -- and I'm sure it's just maybe the math of it, and obviously, we don't have the full -- or I didn't pencil it around a little bit. You said around 15% of the SKUs were impacted by the price adjustments, and it was only in half the stores.

And I guess I was wondering -- it seems like a pretty big impact on the gross margin for the quarter. And I was just wondering, am I misunderstanding something there? Or were the discounts pretty significant? Or is it just simply -- if I had the math in front of me, I would see how it pencils out?

Hey, Joe. Good morning. This is Kirk. If you think about the 200 basis points of margin erosion versus last year or versus Q1, about half of that was the pricing test that we talked about, and the other half was the customer delivery and some impact from our inventory transition.

So, we feel pretty good about the pricing tests being something that's not recurring in the back half, because we reduced the number of SKUs and the number of stores where we are continuing some of that activity. And we also expect that the customer delivery trend in the back half will moderate somewhat as well, again, as those newer stores get up the revenue curve and we can justify a little bit more shipping activity between the DC and store.

Got it. That's helpful. Thank you for that. And then just one other follow-up, I think sort of maybe Peter touched on it with the advertising a little bit. But I wanted to ask about advertising effectiveness. I know it's something that you guys have been working on for a while. Just anything new on that front?

I know you mentioned that there is a modest impact from ad expenses being up a little bit in the quarter. But anything on the effectiveness side of what you're doing there that you can share?

Sure, Joe, I'll take a shot and then if Chris wants to chime in, I'll let him do that. But I think, first of all, just in terms of the overall investment, as you recall, it was a little higher in Q1 year-over-year. We did some tests that were unique to Q1. We feel like we gleaned a lot of learnings from the various tests that we did.

The items that worked, we certainly have deployed on into Q2, and we will continue to do that in the back half of the year. And we did do some pretty good analysis in terms of what things were driving incremental profitability. And we continue to do that. That really hasn't stopped.

There's various things that we continue to try. But the things that have worked and are definitely generating an incremental return, we will continue. But overall, for the year, we still expect it to be in that 2.5% to 3% of sales range. So pretty consistent with historical expectations. We are just continuing to do a better job with the overall dollars that we have.

Got it. That's helpful. Thanks. And then if I could follow-up with one more. Just on -- I know you guys had said that the impact of some of the investments in price weren't as obviously as great as you had hoped. But it does seem like you saw an acceleration in sales.

So -- and I apologize if I missed it, but maybe you could just clarify for me one more time, like, what was driving that lift, I guess, that overall sales were as strong as they were, but it wasn't really the price investment that drove it?

Joe, this is Kirk again. So when we started some of the tests in the early part of the quarter, we had a smaller group of stores where it appears we definitely generated margin lift. And it appears that, generally, within that group of stores, our team in the store was well-equipped to deal with the lower-priced SKUs, and moderate their discounting activity.

So I think they did a good job leading in the store and making sure we had the right behavior from sales associates, and not getting too aggressive on discounts for the lower-priced product. As we rolled that out to a larger group of stores, we weren't as successful. We just -- we didn't get the right behavior. Arguably, we needed to maybe do a better job of training and communicating to those sales associates in the larger group of stores. And the discounting was frankly just unchanged and too aggressive, given the fact that we had lower price point SKUs.

And so we've rolled that back to the stores that have demonstrated that they can do it well. And also, I think in Chris's comments in the intro, we talked about bringing in a certain amount of opening price point SKUs here in the next several months. And that should be helpful in terms of both protecting our overall margin and profitability, but also getting potentially a broader group of stores the ability to have those lower price points.

Got it. That's helpful. Thank you, guys. Good luck with this quarter. Thanks.

Thank you, Joe.

Thanks, Joe.

Thank you. Ladies and gentlemen, that does conclude our program for today. We thank you for your attendance, and you may all disconnect. Have a great rest of your day.